Rama Krishna Vadlamudi, HYDERABAD

29 August 2011

Reserve Bank of India has issued its Draft Guidelines for issue of new bank licenses in India in the private sector. In a circular issued on 29 August 2011, RBI has invited comments from various stakeholders. Final guidelines will be issued after receiving feedback from the public and subject to some amendments to the Banking Regulation Act. RBI has been moving very cautiously with regard to issuing new bank licenses. In the last two decades, RBI has issued only 12 new bank licenses. It is of the opinion that its experience with the promoters of new private sector banks is not up to the mark. Another issue that is bothering the RBI is the corporate structure of the new banks as well as the existing banks. Now, banks have become financial conglomerates offering a bouquet of financial services, like, banking, insurance and broking all under one roof. These services are coming under different regulators, like, SEBI, IRDA, stock exchanges, and PFRDA. The challenge for the RBI is to have a full regulatory control over these financial conglomerates and to sort our any differences among the regulators backed by strong legislation.

What are the salient features of the RBIs Draft Guidelines?

Initial Capital: The minimum initial capital shall be Rs 500 crore Eligible Promoters: Promoters should be resident Indians with a minimum successful track record of 10 years. Ownership and management should be different in the promoter group that owns the new bank. However, promoter groups which have 10 per cent or more income from real estate, construction or broking will not be eligible for the new bank license. NBFCs: Existing Non-Banking Finance Companies can convert themselves into banks or apply for a new banking license Corporate Structure: Promoters have to set up a wholly-owned non-operative holding company (NOHC). This NOHC will hold the new bank as well as other financial services companies, like, life insurance, general insurance and others.

Rama Krishna Vadlamudi, HYDERABAD 29 August 2011 www.scribd.com/vrk100 MY BLOG: www.ramakrishnavadlamudi.blogspot.com

Foreign holding: Total foreign holding from FDI, FIIs and NRIs cannot exceed 49 per cent of the total stake for the first five years. Currently, the total foreign shareholding in private sector banks cannot exceed 74 per cent of the paid-up capital. Fifty per cent of directors in the banks board shall be independent All applicants shall submit their business model to RBI while forwarding their applications The new bank shall get itself listed on a stock exchange within two years Minimum capital adequacy is 12 per cent for a minimum period of three years The bank shall open at least 25 per cent branches in unbanked rural centres

How many licenses may be issued by RBI?

Many entities have been waiting in the wings for a banking license. However, RBI may issue a maximum of only five to ten licenses.

Who are the likely aspirants for the licenses?

The following entities/promoters may seek new bank licenses:
Tata group Aditya Birla group (Kumar Mangalam Birla) Bajaj Finserv (of Baja Auto) Reliance Capital (of Anil Ambani) L&T Finance Holdings (of Larsen & Toubro) Mahindra & Mahindra Sundaram Finance IFCI Limited SREI Finance

However, groups, like, Religare and IndiaBulls may not be eligible for the new bank license as RBI is not in favour of issuing bank licenses to promoter groups connected with construction, real estate or broking activities.

When are the new bank licenses likely to be issued by RBI?

RBI has issued only draft guidelines now and it will take another five to six months to issue final guidelines. Overall, it may take another one year from now for RBI to actually issue any new bank license.

What are the amendments needed for the Banking Regulation Act?
Before issuance of new bank licenses, RBI has stated that the following amendments, inter alia, are required before issuing any new bank license: Removal of restriction of voting rights Empowering RBI to supersede the Board of Directors of a bank so as to protect depositors interest; and Facilitating consolidated supervision.

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Rama Krishna Vadlamudi, HYDERABAD 29 August 2011 www.scribd.com/vrk100 MY BLOG: www.ramakrishnavadlamudi.blogspot.com

Who will benefit once new bank licenses are issued?

Banking is yet to see its full potential in India. New bank licenses will increase the reach of the banking in India. Banking services will increase in depth and variety. This may ultimately benefit the existing as well as new customers. Banking services play a pivotal role in a developing economy and may strengthen the financial services sector in India and thus increasing Indias national income.

What is the Background?

The Finance Minister made an announcement of issuing new bank licenses in his Union Budget speech in February 2010. Following the FMs announcement, RBI released, on 11th August 2010, a discussion paper for issuing new bank licenses. These Draft Guidelines have now been issued after receiving various comments and suggestions from various parties and consultations with the Government of India. Licenses for ten private sector banks were issued based on the RBI Guidelines of 1993. These banks, include, ICICI Bank, IDBI Bank (merged with IDBI Limited in 2005), HDFC Bank, IndusInd Bank, UTI Bank (now Axis Bank), Times Bank (merged with HDFC Bank in 2000), Global Trust Bank (merged with Oriental Bank of Commerce in 2004), and Centurion Bank (merged with HDFC Bank in 2008). Licenses for another two private sector banks Kotak Mahindra Bank and Yes Bank were issued in 2003/2004 based on the RBI Guidelines of 2001. Abbreviations: SEBI Securities and Exchange Board of India, IRDA Insurance Regulatory and Development Authority, PFRDA Pension Fund Regulatory and Development Authority, FDI Foreign Direct Investment, FII Foreign Institutional Investor, and NRI Non-Resident Indian. Sources: RBI website
Disclaimer: The authors views are personal. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions For authors articles on financial markets, just click: www.scribd.com/vrk100 www.ramakrishnavadlamudi.blogspot.com .

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