Sharing insights

Licensing of New Banks in the Private Sector 22 February 2013

www.pwc.com/in

The much awaited final guidelines for licensing of New Banks in the Private Sector is released by the Reserve Bank of India (RBI) today i.e., 22 February 2013.

Executive Summary The final guidelines lay down criteria with respect to Promoter eligibility, corporate

The RBI had released a Discussion Paper on 11 August 2010 and thereafter, the draft guidelines on the licensing of new banks were released on 29 August 2011 by RBI. The guidelines have been finalised taking into account feedback from stakeholders, the media and the important amendments in December 2012 to the Banking Regulation Act, 1949.

structure, foreign shareholding, corporate governance, prudential and exposure norms; both on a stand-alone and a consolidated basis. The applicants will have to prepare a detailed project report and a business plan giving details, amongst other things, of how the applicant proposes to achieve financial inclusion. There have been certain amendments vis--vis the draft guidelines including

We have summarised the key highlights of the final guidelines.

amendments to promoter credentials. The express restriction on groups engaged in activities such as real estate and capital markets including broking has been replaced by an in-principle restriction on activities which are speculative in nature or subject to 1

high asset price volatility. Further, NOFHCs have also been permitted to leverage (subject to prescribed limits), which was not permitted in the draft guidelines. Corporate structure Key highlights of the guidelines are as follows: Eligible Promoters The following entities / groups shall be eligible to promote a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC) o o Private sector entities that are owned and controlled by residents; Public sector entities. NOFHC to be the chosen mode of operation

PwC News Alert February 2013

Shareholding by promoters and/or relatives and/or entities in which promoters/relatives holds greater than 50% shares is capped at 10% Group companies in which public hold not less than 51% should hold 51% or more share capital NOFHC should hold all regulated financial entities of the group (in which the group has significant influence1 or control) An activity that can be undertaken departmentally by the bank should be undertaken by the bank itself Certain activities2 are required to be conducted through a Joint Venture/ Subsidiary/ Associate which will be held by the NOFHC Corporate structure should not impede ring fencing of the financial services entities held by the NOFHC Entities held by NOFHC should be regulated by respective regulators NOFHC should not be permitted to set up new financial services entity for three years, except where subsidiary/JV/associate of bank is legally required or permitted by RBI

Promoters / Promoter Groups with an existing NBFC will also be eligible. The terms Promoter and Promoter Group have been defined exhaustively in the guidelines.

Fit and Proper criteria

Entities / groups should have a past record of sound credentials and integrity, be financially sound with a successful track record of running their business for at least 10 years.

Feedback may be sought from other regulators, and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc.
1 2

As defined in Accounting Standard 23 Specialized activates like Insurance, Mutual Fund, Stock Broking, Infrastructure Debt Fund, etc. 2

Shares of the NOFHC shall not be transferred to any entity outside the promoter group, any change in shareholding in excess of 5% should be subject to RBI approval

Foreign Shareholding

PwC News Alert February 2013

Aggregate foreign shareholding should not exceed 49% for first five years, after which it will be as per the extant policy For the first five years, no non resident, directly or indirectly should hold more than 5% of voting equity

Regulatory framework NOFHC should be registered as NBFC with RBI and will be governed by a separate set of directions issued by RBI The financial entities held by NOFHC will be regulated by respective financial sector regulators

Prudential Norms Should be applied both on stand-alone as well as consolidated basis 25% of the profits should be transferred to reserve fund each year3 Leverage up to 1.253 times of its paid up equity and free reserves is permitted NOFHC to adhere to Basel II/III4 norms as promulgated by RBI

Capital requirements Minimum capital of 5 billion Indian rupees 40% of the paid up capital should be held by NOFHC which shall be locked in for five years If further equity capital is raised within five years, NOFHC should continue to hold 40% Shareholding in excess of 40% should be brought down to 40% within three years, to 20% within 10 years and to 15% within 12 years Bank should maintain a minimum capital adequacy ratio of 13% for at least three years, subject to upward revision by RBI On a consolidated basis, NOFHC should maintain a minimum capital adequacy ratio of 13% for at least three years To be publicly listed within three years
3 4

Compliance on a standalone basis Compliance on Consolidated basis 3

Exposure Norms Particulars Within Promoter Group Investment Credit Only to entities under it N.A Outside Promoter Group Investment Prohibited Credit Prohibited

Restricted to 10% of consolidated capital Subject to prescribed rules Equity instruments of other NOFHCs prohibited As per exposure norms

Greater than 5% holding in the bank subject to approval by RBI

PwC News Alert February 2013

Greater than 10% holding in the bank other than by the NOFHC forbidden, directly or indirectly 25% of new branches in unbanked rural areas with a population of less than 9999 as per the latest census If greater than 40% of promoter group income/assets from non financial business, RBI approval required for raising voting equity capital beyond 10 billion Indian rupees for every block of 5 billion Indian rupees In case of NBFC conversion/setting up bank, permission to convert existing branches of NBFC to be granted only in tier 2-6 cities. Tier 1 conversion subject to RBI approval.

Stand Alone NOFHC

Only to entities under it N.A

Consolidated NOFHC

Bank

Prohibited

Prohibited

As per exposure norms Not expressly prescribed in the final guidelines

Way forward

Residual Financial entities under NOFHC

Prohibited

Prohibited

The RBI has invited applications by 1 July 2013. Post initial screening by the RBI, the applications will be referred to a High Level Advisory Committee, which will comprise of eminent persons with experience in banking, financial sector and other relevant areas. This Committee will submit recommendations to RBI and RBI will take a final decision on grant of in-principle approval to aspirants. Amongst other things, the RBI will consider applicants who have an impeccable track record and entities which are likely to adhere to best standards of customer service and efficiency. The in-principle approval will be valid for a period of one year; and may be withdrawn by the RBI if any adverse features are noticed within the Promoters or Promoter Group.

Others Arms length relation with Promoter Group

PwC News Alert February 2013

Our Offices
For private circulation only
Ahmedabad President Plaza, 1st Floor Plot No 36 Opp Muktidham Derasar Thaltej Cross Road, SG Highway Ahmedabad, Gujarat 380054 Phone +91-79 3091 7000 Kolkata South City Pinnacle, 4th Floor, Plot XI/1, Block EP, Sector V Salt Lake Electronic Complex Bidhan Nagar Kolkata 700 091 Phone +91-33 4404 6000 / 44048225 Bangalore 6th Floor, Millenia Tower 'D' 1 & 2, Murphy Road, Ulsoor, Bangalore 560 008 Phone +91-80 4079 7000 Mumbai PwC House, Plot No. 18A, Guru Nanak Road - (Station Road), Bandra (West), Mumbai - 400 050 Phone +91-22 6689 1000 Bhubaneswar IDCOL House, Sardar Patel Bhawan Block III, Ground Floor, Unit 2 Bhubaneswar 751009 Phone +91-674 253 2279 / 2296 Gurgaon Building No. 10, Tower - C 17th & 18th Floor, DLF Cyber City, Gurgaon Haryana -122002 Phone : +91-124 330 6000 Chennai PwC Center, 2nd Floor 32, Khader Nawaz Khan Road Nungambakkam Chennai 600 006 Phone +91-44 4228 5000 Pune GF-02, Tower C, Panchshil Tech Park, Don Bosco School Road, Yerwada, Pune - 411 006 Phone +91-20 4100 4444 Hyderabad #8-2-293/82/A/113A Road no. 36, Jubilee Hills, Hyderabad 500 034, Andhra Pradesh Phone +91-40 6624 6600 For more information contact us at, pwctrs.knowledgemanagement@in.pwc.com

The above information is a summary of recent developments and is not intended to be advice on any particular matter. PricewaterhouseCoopers expressly disclaims liability to any person in respect of anything done in reliance of the contents of these publications. Professional advice should be sought before taking action on any of the information contained in it. Without prior permission of PricewaterhouseCoopers, this Alert may not be quoted in whole or in part or otherwise referred to in any documents 2013 PricewaterhouseCoopers. All rights reserved. "PwC", a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.