Guidelines for Licensing of New Banks in the Private Sector

Preamble
Over the last two decades, the Reserve Bank of India (RBI) licensed twelve banks in the private sector. This
happened in two phases. Ten banks were licensed on the basis of gidelines issed in !anar" #$$%. The gidelines
were revised in !anar" &''# based on the e(perience gained from the fnctioning of these banks, and fresh
applications were invited. The applications received in response to this invitation were vetted b" a )igh *evel
+dvisor" ,ommittee constitted b" the RBI, and two more licences were issed.
The -nion .inance /inister had made an annoncement in his bdget speech for &'#'0## that the RBI was
considering giving some additional banking licences to private sector pla"ers. 1on0Banking .inancial ,ompanies
cold also be considered, if the" meet the RBI2s eligibilit" criteria.
In prsance of the bdget annoncement, the RBI pt ot a 3iscssion Paper on its website on +gst ##, &'#'
inviting feedback and comments.
The 3iscssion Paper elicited wide response from the general pblic, consltants, e(isting banks, indstrial and
bsiness hoses, 1on0Banking .inancial ,ompanies, /icro .inance Instittions, etc. throgh emails and letters.
There was e(tensive discssion in the media throgh anal"tical pieces as well as editorial opinion. The RBI also
held discssions with important stakeholders. The gist of these comments and discssions was placed on the RBI2s
website on 3ecember &%, &'#'.
The draft gidelines on 4*icensing of 1ew Banks in the Private 5ector2 were framed taking into accont the
e(perience gained from the fnctioning of the banks licensed nder the gidelines of #$$% and &''# and the
feedback and sggestions received in response to the 3iscssion Paper. The draft gidelines were placed on the
RBI2s website on +gst &$, &'## for comments. The comments received on the draft gidelines have been
e(amined. The gidelines have been finali6ed taking into accont the important amendments in 3ecember &'#& to
the Banking Reglation +ct, #$7$, the sggestions8comments received on the draft gidelines and in consltation
with the 9overnment of India.
:hile preparing these gidelines, the Reserve Bank recogni6es the need for an e(plicit polic" on banking strctre
in India keeping in view the recommendations of the 1arasimham ,ommittee, Raghram Ra;an ,ommittee and
other viewpoints. +ccordingl", the Reserve Bank wold come ot with an overall polic" discssion paper on
banking strctre in India within two months.
&. 9idelines
(+) <ligible Promoters
(i) <ntities 8 grops in the private sector that are 4owned and controlled b" residents2 =as defined in 3epartment of
Indstrial Polic" and Promotion (3IPP) Press 1ote &, % and 7 of &''$ 8 .</+ Reglations as amended from time
to time> and entities in pblic sector shall be eligible to promote a bank throgh a wholl"0owned 1on0Operative
.inancial )olding ,ompan" (1O.),).
(ii) Promoters 8 Promoter 9rops# with an e(isting non0banking financial compan" (1B.,) will be eligible to
appl" for a bank licence. If considered eligible for promoting a bank, the" will have to compl" with the
re?irements laid down in these gidelines as also the conditions specified in paragraph & (*) below.
(B) 4.it and Proper2 criteria
Promoters8 Promoter 9rops as defined in these gidelines shold be 4fit and proper2 in order to be eligible to
promote banks throgh a wholl" owned 1O.),. RBI wold assess the 4fit and proper2 stats of the applicants on
the basis of following criteria@
(a) Promoters8 Promoter 9rops shold have a past record of sond credentials and integrit"A
(b) Promoters8 Promoter 9rops shold be financiall" sond and have a sccessfl track record of rnning their
bsiness for at least #' "ears.
RBI ma", inter alia, seek feedback on applicant 9rops on these or an" other relevant aspects from other reglators,
and enforcement and investigative agencies like Income Ta(, ,BI, <nforcement 3irectorate, etc. as deemed
appropriate.
(c) Promoter 8 Promoter 9rops2 bsiness model and bsiness cltre shold not be misaligned with the banking
model and their bsiness shold not potentiall" pt the bank and the banking s"stem at risk on accont of grop
activities sch as those which are speclative in natre or sb;ect to high asset price volatilit".
(,) ,orporate strctre of the 1O.),
(I) Promoter 8 Promoter 9rop will be permitted to set p a bank onl" throgh a wholl"0owned 1on0Operative
.inancial )olding ,ompan" (1O.),).
(ii) The capital strctre of the wholl"0owned 1O.), set p b" Promoter 8 Promoter 9rops in Private 5ector shall
consist of @
a) voting e?it" shares not e(ceeding #' per cent of the total voting e?it" shares of the 1O.), held b" an"
individal belonging to the Promoter 9rop, along with his relatives (as defined in 5ection B of the ,ompanies +ct
#$CB) and along with entities in which he and 8 or his relatives hold not less than C' per cent of the voting e?it"
shares, and
b) companies forming part of the Promoter 9rop whereof companies in which the pblic hold not less than C# per
cent of the voting e?it" shares shall hold not less than C# per cent of the total voting e?it" shares of the 1O.),.
(iii) The 1O.), shall hold the bank as well as all the other financial services entities of the 9rop reglated b"
RBI or other financial sector reglators. The ob;ective is that the )olding ,ompan" shold ring fence the reglated
financial services entities of the 9rop, inclding the bank from other activities of the 9rop i.e., commercial,
indstrial and financial activities not reglated b" financial sector reglators and also that the bank shold be ring
fenced from other reglated financial activities of the 9rop. Ths, onl" non0financial services companies 8 entities
and non0operative financial holding compan" in the 9rop and individals belonging to Promoter 9rop will be
allowed to hold shares in the 1O.),. .inancial services entities whose shares are held b" the 1O.), cannot be
shareholders of the 1O.),.
(iv) The general principle is that no financial services entit" held b" the 1O.), wold be allowed to engage in an"
activit" that a bank is permitted to ndertake departmentall". In this conte(t, it is clarified that @
(a) RBI re?ires certain specialised activities, sch as, insrance, mtal fnds, stock broking, infrastrctre debt
fnds, etc. to be condcted throgh a separate 5bsidiar" 8 !oint Dentre 8 +ssociate strctreA
(b) There are certain activities sch as credit cards, primar" dealers, leasing, hire prchase, factoring, etc., which a
bank can condct either from within the bank or throgh a separate otside strctre (5bsidiar" 8 !oint Dentre 8
+ssociate).
+ccordingl", the activities at (a) above and activities at (b) above which are to be carried otside the bank will have
to be carried ot throgh separate financial entities nder the 1O.),.
(v) RBI will have to be satisfied that the corporate strctre does not impede the financial services entities held b"
the 1O.), from being ring fenced, that it wold be able to spervise the bank, the 1O.),, and its 5bsidiaries 8
!oint Dentres 8 +ssociates on a consolidated basis, and that, it will be able to obtain all re?ired information
relevant for this prpose, smoothl" and promptl". )owever, the primar" spervision of the entities held b" the
1O.), will be b" the sectoral reglators.
(vi) The 1O.), shall not be permitted to set p an" new financial services entit" for at least three "ears from the
date of commencement of bsiness of the 1O.),. )owever, this wold not preclde the bank from having a
sbsidiar" or ;oint ventre or associate, where it is legall" re?ired or specificall" permitted b" RBI.
(vii) Onl" those reglated financial sector entities in which a Promoter 9rop has significant inflence& or control
will be held nder the 1O.),.
(viii) The Promoter 8 Promoter 9rop entities 8 individals associated with Promoter 9rop shall hold e?it"
investment, in the bank and other financial entities held b" it, onl" throgh the 1O.),.
(i() 5hares of the 1O.), shall not be transferred to an" entit" otside the Promoter 9rop. +n" change in
shareholding (b" the Promoter 9rop) with in the 1O.), as a reslt of which a shareholder ac?ires C per cent or
more of the voting e?it" capital of the 1O.), shall be with the prior approval of RBI.
(3) /inimm voting e?it" capital re?irements for banks and shareholding b" 1O.),
(i) The initial minimm paid0p voting e?it" capital for a bank shall be EC billion. +n" additional voting e?it"
capital to be broght in will depend on the bsiness plan of the Promoters.
(ii) The 1O.), shall hold a minimm of 7' per cent of the paid0p voting e?it" capital of the bank which shall be
locked in for a period of five "ears from the date of commencement of bsiness of the bank.
(iii) 5hareholding b" 1O.), in the bank in e(cess of 7' per cent of the total paid0p voting e?it" capital shall be
broght down to 7' per cent within three "ears from the date of commencement of bsiness of the bank.
(iv) In the event of the bank raising frther voting e?it" capital dring the first five "ears from the date of
commencement of bsiness, the 1O.), shold contine to hold 7' per cent of the enhanced voting e?it" capital
of the bank for a period of five "ears from the date of commencement of bsiness of the bank. Doting e?it" capital,
other than the holding b" 1O.),, cold be raised throgh pblic isse or private placements.
(v) The shareholding b" 1O.), shall be broght down to &' per cent of the paid0p voting e?it" capital of the
bank within a period of #' "ears, and to #C per cent within #& "ears from the date of commencement of bsiness of
the bank.
(vi) The capital re?irements for the reglated financial services entities held b" the 1O.), shall be as prescribed
b" the respective sectoral reglators. The bank shall be re?ired to maintain a minimm capital ade?ac" ratio of #%
per cent of its risk weighted assets (R:+) for a minimm period of % "ears after the commencement of its
operations sb;ect to an" higher percentage as ma" be prescribed b" RBI from time to time. On a consolidated
basis, the 1O.), and the entities held b" it shall maintain a minimm capital ade?ac" of #% per cent of its
consolidated R:+ for a minimm period of % "ears.
(vii) The bank shall get its shares listed on the stock e(changes within three "ears of the commencement of bsiness
b" the bank.
(<) Reglator" framework
(i) The bank will be governed b" the provisions of the Banking Reglation +ct, #$7$, Reserve Bank of India +ct,
#$%7, .oreign <(change /anagement +ct, #$$$, Pa"ment and 5ettlement 5"stems +ct, &''F, other relevant
5tattes and the 3irectives, Prdential reglations and other 9idelines8Instrctions issed b" RBI and other
reglators from time to time, inclding the reglations of 5<BI regarding pblic isses and other gidelines
applicable to listed banking companies.
(ii) The 1O.), will be registered as a non0banking financial compan" (1B.,) with the RBI and will be governed
b" a separate set of directions issed b" RBI.
(iii) The financial entities held b" the 1O.), will be governed b" the applicable 5tattes and reglations
prescribed b" the respective financial sector reglators.
(.) .oreign shareholding in the bank
1otwithstanding the crrent .3I polic", where foreign shareholding in private sector banks is allowed p to a
ceiling of F7 per cent of the paid0p voting e?it" capital, the aggregate non0resident shareholding from .3I, 1RIs
and .IIs in the new private sector banks shall not e(ceed 7$ per cent of the paid0p voting e?it" capital for the first
C "ears from the date of licensing of the bank. 1o non0resident shareholder, directl" or indirectl", individall" or in
grops, or throgh sbsidiar", associate or ;oint ventre will be permitted to hold C per cent or more of the paid0p
voting e?it" capital of the bank for a period of C "ears from the date of commencement of bsiness of the bank.
+fter the e(pir" of C "ears from the date of commencement of bsiness of the bank, the aggregate foreign
shareholding wold be as per the e(tant .3I polic".
(9) ,orporate governance of 1O.),
The 1O.), shold compl" with the corporate governance gidelines as issed b" RBI from time to time. 5ch
gidelines ma" inclde the following@
(i) 1o 1O.), shall have as a 3irector in its Board of 3irectors, an" person who is a 3irector in an" other 1O.),
or a bank other than a banking compan" nder it.
(ii) 1o 1O.), shall be managed b" an" person0
(a) who is a 3irector in an" other compan" not being
a sbsidiar" of the 1O.), or
a compan" registered nder 5ection &C of the ,ompanies +ct, #$CB (# of #$CB) or
(b) who is engaged in an" other bsiness or vocation.
(iii) 1O.), shall compl" with sch sondness standards in terms of corporate governance inclding 4fit and
proper2 criteria, as applicable to banks% to the e(tent the" are appropriate.
(iv) +t least C' per cent of the 3irectors of 1O.), shall be totall" independent of the Promoter or Promoter 9rop
entities and their ma;or cstomers and ma;or sppliers7.