Industrial and business houses wanting to set up banks will have to adhere to strict corporate governance regulations and ensure the bank does not give any preferential treatment to the promoters? other businesses. These new private banks will also have to aggressively pursue the government?s financial inclusion agenda from the very beginning, according to the Reserve Bank of India?s draft guidelines submitted to the finance ministry.
After vetting by the finance ministry, the central bank will announce the final guidelines for the entry of new private banks by the end of this month.
The RBI has stipulated that business conglomerates setting up banks will have to ensure that 50% of the board of the non-operative holding company (NOHC) ? which will hold all the group?s investment in the bank and other regulated financial services companies ? consists of independent directors. Moreover, the majority of the board of the new bank itself will have to be independent directors.
According to official sources, the central bank would also stipulate that the bank?s exposure to any entity in the promoter group, its associates, major suppliers and customers will not exceed 10%, and aggregate exposure to such entities will not exceed 20% of the paid-up capital and reserves of the bank. All exposures will be approved by the board and will be converted with a minimum tangible security of 150%. The new banks will also have to maintain a minimum capital adequacy ratio of 12% for a minimum period of three years after beginning operations. The corporate governance norms stipulated by the apex bank will also prevent a financial services arm of industrial houses wanting to set up a bank from offering services such as accepting deposits and offering loan facilities, as this would lead to the firm being in competition with the bank. Such groups will, however, have the option to promote a new bank or convert their financial services arm into a bank. Banking licences will be given to such companies (having a financial services operation) once their financial services arm is also moved under the NOHC.
The NOHC, on the other hand, shall not be permitted to set up any new financial services entity (apart from any existing ones of the promoter group) for a period of at least three years. With regard to financial inclusion, the new private sector banks will be mandated to open at least 25% of their new branches in un-banked areas with populations of less than 10,000 from the very initial period of banking services rollout. In fact, these entities will have to provide financial inclusion plans with their applications and in case a deviation from such plan is found, the RBI may consider restricting banks? expansion, effecting a change in management or other penal measures. They will also have to comply with priority sector lending targets and sub-targets. As reported earlier, the RBI has suggested that new banks will have to start with an initial capital of R500 crore with a 49% cap on foreign shareholding.
The RBI has requested the government to take a view whether the cap would require a change in the FDI policy that allows foreign holding up to 74% in existing private sector banks. Under the draft guidelines, the NOHC structure has been proposed to ring-fence the financial services activities of the group including the new bank from other activities of the group such as commercial, industrial and financial activities not regulated by a financial sector regulator.
The NOHC will be registered as a non-banking financial company with the RBI and will be governed by a separate set of prudential guidelines. It will also not be permitted to borrow funds for investing in group companies and just act as vehicle to hold investment in all regulated financial sector entities on behalf of the promoter. The NOHC will hold 40% of the paid-up capital of the bank with a lock-in period of five years. If it is in excess of 40%, the NOHC will have to bring it down to 40% within two years. This stake will have to be brought down to 15% within 10 years and be retained at that level. If the bank raises further capital during the first five years, the NOHC will continue to hold 40% of the enhanced capital of the bank for a further period of five years.
The draft guidelines has also bar entities or groups having either 10% or more of their income and assets in real estate or broking activities taken together in the last three years from promoting new banks. In the case of Indian private sector applicants, only those having a diversified ownership and successful track record of at least 10 years of operations will be eligible to promote banks. Apart from the NOHC, no single entity or group will hold more than 10% of paid-up capital of the new bank. Shareholding of 5% or more of the paid-up capital of the bank by individuals, entities or groups will require the prior approval of the RBI.