These banks will be located in Andhra Pradesh, Tamil Nadu, Rajasthan, Gujarat and Punjab. The Andhra Pradesh bank -- Coastal Local Area Bank -- will cover Krishna, Guntur and West Godavari districts.

This is the second lot of LABs for which the central bank has given in-principle clearance ever since former finance minister in the United Front government P Chidambaram mooted the concept of local area banks in his budget in 1996.

The RBI had earlier given in-principle clearances to two industrial groups to set up LABs in Karanataka and Maharashtra. However, not a single LAB has yet been set up. According to sources, the promoters of these two proposed banks have not been able to meet all the regulatory requirements.

The RBI has pegged the minimum equity base of a LAB at Rs 5 crore. The capital adequacy ratio is pegged at 8 per cent. The LABs will be identical to the regional rural banks, but will be entirely in the private sector and cover a few contigious districts.

These banks will have the freedom to fix deposit and lending rates without any interference from the state and central governments. The banks will follow the RBI guidelines applicable to RRBs and start operations with a capital adequacy ratio of 8 per cent.

The minimum paid-up capital for each of these LABs is Rs 5 crore with the promoters' contribution being a minimum of Rs 2 crore. The area of operations will be a maximum of three geographical contigious districts.

The voting of an individual holder will be governed by the ceiling of 10 per cent of the total voting rights as stipulated under Section 12 (2) of the Banking Regulation Act 1949.