RBI issues guidelines for new banking licence

The Reserve Bank of India (RBI) on Friday issued the final guidelines for licensing of new private sector banks wherein entities both from private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC).
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Feb 23, 2013, 03.34 PM | Source: Moneycontrol.com

RBI issues guidelines for new banking licence

The Reserve Bank of India (RBI) on Friday issued the final guidelines for licensing of new private sector banks wherein entities both from private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC).

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RBI issues guidelines for new banking licence

The Reserve Bank of India (RBI) on Friday issued the final guidelines for licensing of new private sector banks wherein entities both from private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC).

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Moneycontrol Bureau

The much-awaited norms for new banking licence are finally out. The Reserve Bank of India (RBI) on Friday issued the final guidelines for licensing of new private sector banks wherein entities both from private and public sector shall be eligible to set up a bank through a wholly-owned non-operative financial holding company (NOFHC).

"The NOFHC shall be wholly owned by the promoter / promoter group. The NOFHC shall hold the bank as well as all the other financial services entities of the group. Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies," RBI said in a release.

Also read: Do we need more banks or bigger banks?

NOFHC - the key for new banking operations...

A business group, which is keen on applying for a license should have a minimum paid up equity capital of Rs 500 crore. At the start of banking operations, NOFHC should hold a minimum of 40 per cent of the equity capital of the bank with a lock-in period of five years. Later, it has to be brought down to 15 percent within 12 year from that onwards.

The NOFHC will be registered as a non-banking finance company with the RBI while the bank will be governed by the prudential regulations by RBI. 

"The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC," RBI said.

Realtors or brokers - can they apply?

It was much debated. While the finance ministry was apparently in favour of allowing them, RBI looked hesitant. In the final guidelines, the central bank has allowed any private or public entity to apply for it. However, it would be the RBI's discretion.

"Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback from other regulators and enforcement and investigative agencies," RBI said with a note of caution.

Rural branches - a bottleneck?

However, the banking regulator put a stricter condition of having 25% of its branches in unbanked rural areas with population upto 9,999. Many believe, for a new banking entity, it will be stumbling block as the brick and mortar model especially in rural areas take time to turn profitable.

In line with existing domestic norms, the new bank should also achieve priority sector lending target of 40%. Interestingly, most of the existing banks are failing to meet the target.

However, the regulator seems to be committed to reach banking services in remote places of India. A back-of-the-envelop calculation suggests, 60% of the population does not have basic banking facilities.

"The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion," RBI said.

FDI is capped at 49%

Foreign shareholding in the new bank shall not exceed 49% for the first five years after which it can extend as per policy norms.

After a span of around 10 years RBI is set to issue fresh banking license. In 2003-04, it had last issued license to Yes Bank and Kotak Mahindra Bank . Prior to that, the central bank had introduced the first round of licenses to 10 private sector banks. 

saikat.das@network18online.com

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