The much awaited document has arrived
— a 19-page note from the Reserve Bank of India
(RBI) dated 22 February 2013, setting out the
guidelines for the licensing of new private sector
banks. Having read it through most of the day, I
must admit that it is well drafted. Let me outline
its key elements and then raise some issues.
Resident Indian private sector entities or groups
will be permitted to promote commercial banks.
Subject to several caveats. For one, the promoters
should be ‘fit and proper’ applicants with
financially and ethically sound past records; should
have successfully run their business for at least
decade; should have a working culture that is not
misaligned with banking; and shouldn’t have had
blots on their bio-data because of tax or CBI
investigations and the like.
For another, the promoters will be permitted to set
up a bank only through a wholly owned Non-Operative
Financial Holding Company (NOFHC). What’s that? The
NOFHC is a ‘step-up’ holding body which will have in
its fold the bank and other financial service
entities of the promoter group that are regulated
either by the RBI or other financial services
regulators such as the Sebi or the Irda. The NOFHC
will be registered as a non-banking financial
company with the RBI and subject to its scrutiny;
and at least half of the board of the NOFHC and the
bank shall comprise independent directors.
The idea is that the NOFHC should ring fence the
bank as well as other regulated financial services
of a promoter group from its non-regulated
activities. It goes further. To protect the bank
from other regulated financial sector activities of
the group such as mutual funds or insurance, the
guidelines state that financial service entities
whose shares are held by the NOFHC cannot be
shareholders of the NOFHC. Moreover, no non-banking
financial services entity belonging to the NOFHC
will be allowed to engage in any banking activity.
There are other restrictions on the bank and the
NOFHC to prevent activities that might be
deleterious to banking. For instance, the bank can
neither lend to nor make investments in the
promoter’s entities, individuals belonging to the
promoter group or firms within the NOFHC. Nor can it
invest in equity or debt instruments of any
financial entity within the NOFHC. Nor, too, can the
bank invest in the equity of any other NOFHC.
The minimum paid up voting equity capital for such a
bank is pegged at Rs.500 crore; and the NOFHC must
hold at least 40 per cent of it for five years. If
an NOFHC holds bank shareholding over 40 per cent —
as it typically will in the beginning — must bring
it down to 40 per cent within three years of the
bank’s starting its business. This has to be reduced
to 20 per cent of voting equity in ten years; and to
15 per cent in twelve. The bank must be listed in
There are restrictions on foreign shareholding.
Although the aggregate foreign ownership of FDI,
FIIs and NRIs of our existing private banks is
allowed up to 74 per cent of voting equity, the RBI
has chosen to limit this to 49 per cent for the
first five years of the life of a new private bank.
Now for the issues. First, I would have preferred
the bank to be allowed to raise foreign shareholding
to above 49 per cent but less than 75 per cent after
two years. Why capital constrain it for five?
Second, there will be difficulties in maintaining a
quarter of the branches of the new banks in unbanked
rural areas with population less than 10,000. You
can have innovative mobile banking intermediation in
such areas; but to expect such tiny branches to earn
their cost of capital is heroic. Third, the bank
applications will be vetted by a High Level Advisory
Committee set up by the RBI. Let us hope that it is
made up of best-of-breed people, who can equally see
the promise of the future as they can the risks of
Based on the note, I’ve made my private list of
which groups will pass muster, and which won’t. But
that’s a private list.
Published: Business World, March 2013