1 ‘2011-RBI Guidelines’ for Licensing Private Sector Banks BY- VIJENDRA PANDEY PGP-FM NATIONAL INSTITUTE OF FINANCIAL MANAGEMENT

2 History Till now RBI has Issued 02 Set of Guidelines for the licensing of the Private sector Banks in the country viz., a) ‘1993 Guidelines’ b) ‘2001 Guidelines’ ‘1993 Guidelines’ allowed for licensing of 10 Private Sector Banks, where as the revised ‘2001 Guidelines’ allowed for 02 more.

3 Events calling for ‘2011 Guideline’ Formation  Resilience of Indian Banking System during the ‘2008 Global Turmoil’.  More penetrated Financial Inclusion as objective.

4 Parameters of ‘2011 Guidelines’ Draft ‘2011 Guidelines’ involve the following Parameters :  Promoters Eligibility  Corporate Structure  Min. Capital required  Foreign Shareholding  Corporate Governance  Business Model  Other Conditions

5 Promoters Eligibility  Entities / groups in private sector owned and controlled by residents will be eligible.  Promoters / Promoter Groups having diversified ownership, sound credentials, integrity & successful track record of at least 10 years in running their businesses will be eligible to promote a bank.  The RBI will consider the nature of activities that is undertaken by the Promoter Group while granting licenses.

6 Corporate Structure  The Promoter / Promoter Group is required to set-up a Wholly Owned Non-Operative Holding Company (‘NOHC’).  The NOHC is to be registered with the RBI as a NBFC and the RBI will prescribe a separate set of prudential guidelines for such NOHCs.  The NOHC will not be allowed to set up any new financial services entity for at least 3 years from the date of licensing.

7 Minimum capital requirements  The initial min. paid-up capital for a new bank will be Rs 500 Cr.  The NOHC is required to hold at least 40% of the paid-up capital of the new bank, at all times during the first 5 years of licensing of the bank.  Shareholding by NOHC in excess of 40% shall be brought down to 20% within 10 years and to 15% within 12 years from the date of licensing of the bank.

8 Foreign shareholding  FDI + FII shall not exceed 49% of the paid-up capital of the bank for the first 5 years of operations.  After 5 yrs it can be increased upto 74% as is provided for in the extant FDI policy.  No non-resident, whether directly or indirectly, individually or in groups will be permitted to hold 5% or more holding in the bank.

9 Corporate Governance  At least 50% of the directors of the NOHC should be Independent Directors.  No financial services entity under the NOHC will be allowed to engage in any activity that a bank is permitted to undertake departmentally.  The Ownership and Management should be separate and distinct in the Promoter / Promoter Group entities that own or control the NOHC.  The source of the Promoters’ / Promoter Group’s equity in the NOHC must be transparent and verifiable.

10 Business Model  The business model will have to address how the bank proposes to achieve financial inclusion.  The business model would need to be realistic and viable & should be in accordance with already stated business plan.

11 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 two years of licensing.  The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)  Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

12 Comparing the 03 Sets of Guidelines S.noParameters‘1993 Guidelines’‘2001 Guidelines’ ‘2011 Guidelines’ 1.Min. Paid-Up Capital Rs. 100 Cr.Rs. 200 Cr.Rs. 500 Cr. 2.Min. Promoters Contribution Determined by RBI40% of the Paid-Up Capital 3.Voting Rights of Individual. Shareholders Ceiling of 1% Ceiling of 5% 4.ProhibitionNot allowed to set up Subsidiary or Mutual Fund in Initial 03 yrs. “ ““

13 Latest Development  As RBI has prior indicated that the Final Guidelines will be issued and the process of inviting applications for setting-up new banks will be initiated only after the necessary amendments are brought about to the ‘BANKING REGULATION ACT’.  Parliament passed the ‘BANKING LAWS (AMMENDMENT) BILL’ in the lower & upper house on 18 th and 20 th Dec.,2012 respectively.

14 THANK YOU