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RBI releases draft guidelines on new banking licenses
The Reserve Bank of India (RBI) on Monday released its much awaited draft guidelines on
new banking licenses in the private sector. The key highlight is that Corporates and NBFCs
have not been explicitly excluded from the possible contenders. However entities/groups
that have significant (10% or more) income or assets or both from/ in real estate and
capital market activities taken together in the last three years, shall not be eligible to
promote banks. Existing NBFCs, if considered eligible, can also be permitted to either
promote a new bank or convert themselves into banks.
Key features of the draft guidelines are as follows:
Eligible promoters: Promoters/promoter groups with diversified ownership, sound
credentials and integrity that have a successful track record for at least 10 years in running
their businesses shall be eligible to promote banks. Entities / groups having significant
(10% or more) income or assets or both from real estate construction and/or broking
activities individually or taken together in the last three years will not be eligible.
Ownership and management will also have to separate and distinct in the applying
promoters/promoter groups.
Corporate structure: New banks will be set up only through a wholly owned Non-
Operative Holding Company (NOHC) to be registered with the Reserve Bank as a nonbanking
finance company (NBFC) which will hold the bank as well as all the other financial
companies in the promoter group. The objective is that the Holding Company should ring
fence the regulated financial services activities of the group including the new bank from
other activities of the group i.e., commercial, industrial and financial activities not
regulated by financial sector regulators. The NOHC will be registered as a non-banking
finance company (NBFC) with the Reserve Bank and will be governed by a separate set of
prudential guidelines. The NOHC will not be permitted to borrow funds for investing in
companies held by it. It will just be a vehicle to hold the investments in all regulated
financial sector entities on behalf of the promoter/promoter group for regulatory and
prudential comfort.
Minimum capital requirement: Minimum capital requirement has been set at `500cr
against general expectations of `1,000cr (for filtering out serious players). Subject to this,
actual capital to be brought in will depend on the business plan of the promoters. NOHC
shall hold minimum 40% of the paid-up capital of the bank for a period of five years from
the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be
brought down to 40% within 5 years, to 20% within 10 years and to 15% within 12 years
from the date of licensing of the bank and retained at that level thereafter.
Foreign shareholding: The aggregate non-resident shareholding from FDI, NRIs and FIIs in
the new private sector banks shall not exceed 49% for the first 5 years from the date of
licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in
groups, will be permitted to hold 5% or more of the paid up capital of the bank. After the
expiry of 5 years from the date of licensing of the bank, the foreign shareholding would be
as per the extant policy. Currently, foreign shareholding in private sector banks is allowed
up to a ceiling of 74% of the paid up capital.
Corporate governance: At least 50% of the directors of the NOHC should be independent
directors. The corporate structure should be such that it does not impede effective
supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.
Business model: Should be realistic and viable and should address how the bank proposes
to achieve financial inclusion.
Other conditions:
• The exposure of bank to any entity in the promoter group shall not exceed 10% and
the aggregate exposure to all the entities in the group shall not exceed 20% of the
paid-up capital and reserves of the bank.
• The bank shall get its shares listed on the stock exchanges within 2 years of
licensing.
• The bank shall open at least 25% of its branches in unbanked rural centres
(population up to 9,999 as per 2001 census)
• The bank shall be required to maintain a minimum capital adequacy ratio of 12%
for a minimum period of 3 years after the commencement of its operations subject
to such higher percentage as may be prescribed by RBI from time to time.
• Existing NBFCs, if considered eligible, may be permitted to either promote a new
bank or convert themselves into banks.
At the time the discussion paper had been released, we had taken the view that diversified
shareholding could be used as one of the criteria by RBI to issue banking licenses. In line
with this view, diversified ownership has been listed as one of the pre-requisites for
applicants in the current guidelines, but the term has not been clearly defined leaving
some ambiguity about the eligible players. In our view, if diversified shareholding was to
be interpreted as not more than 26% promoter share-holding, then amongst the large,
reputed corporate with deep enough pockets to promote a bank that have also expressed
interest in applying for a license, L&T group appears to be one of the few logical
contenders.
Taking into account the criteria regarding diversified ownership as well as RBI’s stated
intention to issue limited number of licenses based on strict selection criteria which may
include discretionary criteria over and above what is explicitly defined in the current
guidelines, we do not expect more than 3 to 4 licences to be issued at this stage. While the
entry of new players is bound to increase the competitive intensity in the sector, keeping in
mind that large private banks still have relatively small marketshare and the bulk of the
marketshare (65-70%) is still with PSU banks, we believe the addressable opportunity is
large enough for private sector banks as a group that the entry of 3-4 players would not
be significantly disruptive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI releases draft guidelines on new banking licenses
The Reserve Bank of India (RBI) on Monday released its much awaited draft guidelines on
new banking licenses in the private sector. The key highlight is that Corporates and NBFCs
have not been explicitly excluded from the possible contenders. However entities/groups
that have significant (10% or more) income or assets or both from/ in real estate and
capital market activities taken together in the last three years, shall not be eligible to
promote banks. Existing NBFCs, if considered eligible, can also be permitted to either
promote a new bank or convert themselves into banks.
Key features of the draft guidelines are as follows:
Eligible promoters: Promoters/promoter groups with diversified ownership, sound
credentials and integrity that have a successful track record for at least 10 years in running
their businesses shall be eligible to promote banks. Entities / groups having significant
(10% or more) income or assets or both from real estate construction and/or broking
activities individually or taken together in the last three years will not be eligible.
Ownership and management will also have to separate and distinct in the applying
promoters/promoter groups.
Corporate structure: New banks will be set up only through a wholly owned Non-
Operative Holding Company (NOHC) to be registered with the Reserve Bank as a nonbanking
finance company (NBFC) which will hold the bank as well as all the other financial
companies in the promoter group. The objective is that the Holding Company should ring
fence the regulated financial services activities of the group including the new bank from
other activities of the group i.e., commercial, industrial and financial activities not
regulated by financial sector regulators. The NOHC will be registered as a non-banking
finance company (NBFC) with the Reserve Bank and will be governed by a separate set of
prudential guidelines. The NOHC will not be permitted to borrow funds for investing in
companies held by it. It will just be a vehicle to hold the investments in all regulated
financial sector entities on behalf of the promoter/promoter group for regulatory and
prudential comfort.
Minimum capital requirement: Minimum capital requirement has been set at `500cr
against general expectations of `1,000cr (for filtering out serious players). Subject to this,
actual capital to be brought in will depend on the business plan of the promoters. NOHC
shall hold minimum 40% of the paid-up capital of the bank for a period of five years from
the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be
brought down to 40% within 5 years, to 20% within 10 years and to 15% within 12 years
from the date of licensing of the bank and retained at that level thereafter.
Foreign shareholding: The aggregate non-resident shareholding from FDI, NRIs and FIIs in
the new private sector banks shall not exceed 49% for the first 5 years from the date of
licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in
groups, will be permitted to hold 5% or more of the paid up capital of the bank. After the
expiry of 5 years from the date of licensing of the bank, the foreign shareholding would be
as per the extant policy. Currently, foreign shareholding in private sector banks is allowed
up to a ceiling of 74% of the paid up capital.
Corporate governance: At least 50% of the directors of the NOHC should be independent
directors. The corporate structure should be such that it does not impede effective
supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.
Business model: Should be realistic and viable and should address how the bank proposes
to achieve financial inclusion.
Other conditions:
• The exposure of bank to any entity in the promoter group shall not exceed 10% and
the aggregate exposure to all the entities in the group shall not exceed 20% of the
paid-up capital and reserves of the bank.
• The bank shall get its shares listed on the stock exchanges within 2 years of
licensing.
• The bank shall open at least 25% of its branches in unbanked rural centres
(population up to 9,999 as per 2001 census)
• The bank shall be required to maintain a minimum capital adequacy ratio of 12%
for a minimum period of 3 years after the commencement of its operations subject
to such higher percentage as may be prescribed by RBI from time to time.
• Existing NBFCs, if considered eligible, may be permitted to either promote a new
bank or convert themselves into banks.
At the time the discussion paper had been released, we had taken the view that diversified
shareholding could be used as one of the criteria by RBI to issue banking licenses. In line
with this view, diversified ownership has been listed as one of the pre-requisites for
applicants in the current guidelines, but the term has not been clearly defined leaving
some ambiguity about the eligible players. In our view, if diversified shareholding was to
be interpreted as not more than 26% promoter share-holding, then amongst the large,
reputed corporate with deep enough pockets to promote a bank that have also expressed
interest in applying for a license, L&T group appears to be one of the few logical
contenders.
Taking into account the criteria regarding diversified ownership as well as RBI’s stated
intention to issue limited number of licenses based on strict selection criteria which may
include discretionary criteria over and above what is explicitly defined in the current
guidelines, we do not expect more than 3 to 4 licences to be issued at this stage. While the
entry of new players is bound to increase the competitive intensity in the sector, keeping in
mind that large private banks still have relatively small marketshare and the bulk of the
marketshare (65-70%) is still with PSU banks, we believe the addressable opportunity is
large enough for private sector banks as a group that the entry of 3-4 players would not
be significantly disruptive.
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