On new banks, RBI holds the keys

The Reserve Bank of India (RBI) on Friday released the much-awaited final guidelines on new banking licences.

Compared with the draft guidelines, the RBI did offer relief on a number of fronts, but kept a lot to its discretion.

The RBI did not specify any sectoral exposure limits in the final norms as it had barred real estate and brokerage sectors in the draft earlier. However, the RBI said that the promoter group activities which are “speculative in nature or subject to high asset price volatility” should not put the bank at risk.

“While they (final norms) do not specifically mention it, it is implicit in the approach the RBI is taking. The regulator is going to be extremely cautious about the people behind the bank,” said Monish Shah, senior director at Deloitte in India.

Apart from existing non-banking finance companies and private companies, the new norms also allow public sector entities to promote a bank through a wholly owned Non-Operative Financial Holding Company (NOFHC).

This opens the door to entities such as IDFC, LIC Housing Finance, Rural Electrification Corporation and Power Finance Corporation.

According to norms, the promoter may hold up to 10% in the NOFHC as an individual and minimum 50%, along with its other invested entities. The public sector entity promoting a bank will have higher voting rights at minimum 51% in the NOFHC.

The RBI also extended the time-period stipulated for listing from two years to three years from date of commencement of business. While the RBI has relaxed some norms, it has tightened the noose around corporate governance. Also, the minimum capital adequacy ratio requirement was increased from 12% to 13% for initial 3 years.

Religare, Mahindra & Mahindra Finance and Aditya Birla Group have expressed their willingness to apply for a banking licence at the earliest. Apart from these, Shriram Group, Tata Capital and L&T Finance are also expected to apply.

The validity of RBI’s in-principle approval is only for a year. It will be selective in giving the final nod even if the entity is eligible as per the criteria.