Corporates, conglomerates whether in the public or private sectors as also non-banking financial companies (NBFCs) can now apply for a banking licence using a non-operative financial holding company (NOFHC) structure. The Reserve Bank of India (RBI), which issued final guidelines for new banks on Friday, refrained from restricting entities that had a significant presence in the real estate and broking sectors from setting up a bank although it had put in some caveats in the draft guidelines. The central bank, which appears to have conquered its fears of self-dealing, will cherry-pick prospective bankers checking out if their credentials and integrity are sound; it has stipulated that the new bank cannot have any exposure whether credit or investments in debt or equity to the promoters, group entities or individuals associated with the promoter group or the NOFHC and will count on feedback from investigative and tax agencies to issue licences on a very selective basis.
The NOFHC must hold a minimum of 40% of the paid-up equity capital of the bank for five years with the stake being pared to 15% within 12 years, the RBI said. While the minimum initial capital needed to set up a bank of R500 crore is relatively small and will lower entry barriers, the condition that 25% of the branches need to be located in unbanked areas is a tough one and will favour large promoters with deep pockets. The mandatory presence in rural areas is challenging because banks need to list within three years of starting operations. Prospective entrants may also be miffed that the RBI has tightened foreign holdings in new banks by capping the aggregate stakes of non-resident Indians FDI and FIIS at 49% for the first five years. Currently, foreign direct investment of up to 74% is allowed in private banks.
The central bank has put in several checks and balances for instance, whether or not any entity belongs to a particular promoter group or nor or whether the entities are linked or related to the promoter group, the RBI said, would be guided by the provisions of the Banking Regulation Act, 1949. The decision of the RBI in the matter will be final, the central bank said.
To prevent round-tripping and circular movement of funds in the banking group, the RBI said the financial entities held by the NOFHC should not have any exposure credit and investments to promoters or promoter-group entities or individuals associated with the promoter group or the NOFHC. Thus, the NOFHC is aimed at ring-fencing the bank from other financial and non-financial activities of the promoter group.
The RBI requires certain specialised activities, such as insurance, mutual funds, stock broking, infrastructure debt funds, etc, to be conducted through a separate subsidiary or joint venture or associate structure, the central bank said. The holding company would be a non-operative entity and registered as an NBFC with the RBI. The bank would be governed by all the existing prudential norms including Basel II and priority sector rules, the RBI said. Applications need to be in by July 1. On a consolidated basis, the holding company will have to maintain minimum capital adequacy ratio under the Basel II norms and under Basel III as well when the guidelines take effect, the RBI said.
Cheques and balances
* Private and public sector entities & NBFCs can apply
* Minimum paid-up equity capital of R500 cr required
* No curbs on brokerages and real estate companies
* NOFHC must cut stake in new bank to 15% in 12 years
* Total foreign stake capped at 49% for first five years
* NOFHC can hold up to 40% for up to 5 years
* Banks must list within 3 years of starting operations