New bank licence norms get tougher as RBI clarifies at length
Mumbai: The Reserve Bank Monday made getting new bank licences more stringent even as it allowed the aspirants to have the holding and capital structure of the bank-holding company in place within 18 months of getting the in-principle nod, instead of 12 months prescribed earlier.
RBI also said aspirants from the NFBC/insurance spaces will have to get the go-ahead from their regulators concerned like SEBI and IRDA and that their views on the same will prevail over the RBI's own views on the proposed non-operative financial holding company (NOFHC), which is the first and foremost criterion for having a bank licence.
"It has been decided to extend the validity period of the in-principle approval from one year to 18 months ... To provide sufficient time for the promoters/promoter groups to comply with various stipulations in the guidelines issued on February 22," RBI said in a circular issued in response to as many as 443 questions from 34 entities.
On the holding and capital structure of NOFHC, RBI said it is not necessary that individual along with his related parties have shareholding in the holding company.
However, if any individual belonging to promoter group chooses to become a promoter of the NOFHC, he can hold only up to 49 percent of the voting equity shares and under 10 percent of the total voting equity shares of the NOFHC.
RBI also said it will not be possible for it to issue licences to all eligible applicants, making it tougher for aspirants to enter into the banking fray. RBI will look for very high quality applications to launch new banks.
The RBI also ruled out any specific number of licences that would be given to applicants and a timeline to do so.
"There is no predetermined number. We will be very selective while considering the applications. We will look for very high quality applications," it said, adding "it may, therefore, be not possible to issue licence to all the applicants meeting the eligibility criteria."
Replying to a specific query on the lack of level-playing due to the insistence on having 25 percent presence in rural areas, RBI said all the incremental branches by the existing players are opened in the same proportion.
Reacting to the clarification, one of the applicants GS Sundararajan of Shriram Group, which is keen to get into mainstream banking, said though there is a lot of detail in the clarifications, RBI has maintained its overall structure. They have expanded a lot on all the aspects and the expansion has made it very complicated.
Commenting on RBI clarifications, Ernst & Young India partner and national leader banking and financial services Ashvin Parekh said: "Today's clarifications have rendered a lot of clarity to the whole process and makes even more difficult for many to finally get the licence.
"The best part is that it has considerably reduced the element of discretion at the hands of the regulator and thus leaving limited rooms for disputes,"
On timeline for granting approvals, it said, "it will not be possible to indicate the timeline for grant of in-principle approvals at this stage."
RBI said final norms on the structure of NOHFCs will be issued separately soon and clarified that independent individuals cannot form a group to set up the proposed holding company.
"If any individual belonging to the promoter group chooses to become a promoter of the NOFHC, he along with his relatives and along with entities in which he and/or his relatives hold not less than 50 percent of the voting equity shares can hold voting equity shares not exceeding 10 percent of the total voting equity shares of the NOFHC.
"Independent individuals forming a group cannot satisfy the above criteria laid down for holding the NOFHC," RBI said.
Additionally, such newly-formed promoter group would not be able to meet one of the 'fit and proper' criteria, which requires promoters/promoter groups to have a successful track record of running their business for at least 10 years, RBI said in its elaborate clarifications.
It further said, "essentially, the intention is that existing groups should set up banks and not groups set up for this purpose. However, it is clarified that individuals belonging to the promoter group can participate in the voting equity shares of the NOFHC... But they together cannot hold more than 49 percent of the voting equity shares of the NOFHC."
Meanwhile, analysts said the clarifications make it easier for corporates to get bank licences than NBFCs and also hailed the clarifications saying it leave lesser room for regulatory discretion and disputes.
Parekh said, "I fear it will hurt many, especially NBFCs as the guidelines look favouring corporates over NBFCs, because the new guidelines are so tough to be complied with.
"With these clarifications I see lesser chances for NBFCs and better chance for corporates to bag new banking licences. It will be much tougher for NBFCs now, I am afraid."
He added only three-four players may finally get the licence.
RBI further said most queries were regarding the provisions on eligible promoters, 'fit and proper' criteria, corporate structure of the NOFHCs, foreign shareholding and on transition time to the new structure.
"Queries were raised on the adherence to different sector specific requirements. Such issues were examined in consultation with Sebi and Irda," RBI said, adding any specific views expressed by these regultors would be prevail.
"The general principle is that the regulated financial services sector entities in which a promoter group has 'significant influence' or 'control' will be held under the NOFHC. While this is a preferred structure, these requirements are subject to the regulations of the respective regulators."
RBI also allayed reservations on the lack of a level-playing field between the existing lenders and the new ones who will be granted licences with regard to issues like rural branch presence and foreign holding.
"With a view to enhancing financial inclusion, the conditions relating to the branch network are specifically prescribed at 25 percent for unbanked rural centres ... This norm has been extended to the existing banks also and they are required to comply with this stipulation while opening new branches," the regulator said.
However, a senior official from a NBFC interested in entering the fray sounded unhappy and called for some way of a regulatory forbearance in the aspect. He said only 8 percent of the branches at present are in rural areas while RBI expects newer players to have it at 25 percent from day one.
"The existing lenders will find it easy to subsidise their rural branches with the large number of branches they have in the lucrative urban centres while the new entrants will have to find ways of dealing with the problem," the official said.
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