New banking licences leave little room for manoeuvre
The draft norms for new banking licences leave little room for manoeuvre.
What's proposed?
The Reserve Bank of India, or RBI, recently issued the draft guidelines it would follow while giving new banking licences to private players. The draft follows an RBI discussion paper last year, seeking views from banks, nonbanking finance companies, or NBFCs, industrial houses and the public, on the matter. Broadly, it makes groups which have successfully run businesses for at least 10 years - and with not more than 10 per cent of their revenues or assets in real estate and broking businesses in the last three years - eligible for licences. They should have a minimum paid-up capital of Rs 500 crore, with foreign holding below 49 per cent. New banks can be set up only through wholly-owned nonoperative holding companies, or NOHCs. The RBI will seek views on the draft until October 31, after which final guidelines will be issued.
What will change?
Currently, India has 27 public sector banks, 22 private sector banks, 31 foreign banks, 86 regional rural banks, and 2,123 cooperative banks of various kinds. The move will open the gates for a large number of industrial houses and companies such as Aditya Birla Group, Tata Capital, Reliance ADAG, Bajaj Group, SKS Microfinance, and Shriram Finance, which already have NBFCs and have been eyeing banking licences, thereby increasing competition and fostering better quality service.
Pros: The idea behind the NOHC, which will hold the bank and other financial services of a group, is to demarcate the financial services of the group - which are overseen by regulators - from its other activities. The NOHC will hold at least 40 per cent of the bank's paid-up capital with a five-year lock-in. Experts believe these steps will prevent systemic risk and attract only serious long-term players. "The RBI's cautious approach is a positive step from the customers' point of view," says Shachindra Nath, Group CEO, Religare Enterprises, which is also keen to enter banking. To ensure a high level of corporate governance, NOHCs should have at least 50 per cent of their boards made up of independent directors.
Cons: The draft requires new banks to meet the same priority sector lending targets existing domestic banks have to follow - 40 per cent of their loans should go to agriculture, rural, small and medium enterprises, and micro-lending sectors; they should open at least 25 per cent of their branches in rural areas - villages with a population of less than 10,000; they should list themselves on stock exchanges within two years of obtaining their licences, and more. Market observers say the purpose behind setting up new banks is to promote greater financial inclusion, and enforcing the norms set for old banks on them will not serve the purpose. RBI should give some leeway to the new players to come up with novel solutions on the key issues banks confront.
The Reserve Bank of India, or RBI, recently issued the draft guidelines it would follow while giving new banking licences to private players. The draft follows an RBI discussion paper last year, seeking views from banks, nonbanking finance companies, or NBFCs, industrial houses and the public, on the matter. Broadly, it makes groups which have successfully run businesses for at least 10 years - and with not more than 10 per cent of their revenues or assets in real estate and broking businesses in the last three years - eligible for licences. They should have a minimum paid-up capital of Rs 500 crore, with foreign holding below 49 per cent. New banks can be set up only through wholly-owned nonoperative holding companies, or NOHCs. The RBI will seek views on the draft until October 31, after which final guidelines will be issued.
What will change?
Currently, India has 27 public sector banks, 22 private sector banks, 31 foreign banks, 86 regional rural banks, and 2,123 cooperative banks of various kinds. The move will open the gates for a large number of industrial houses and companies such as Aditya Birla Group, Tata Capital, Reliance ADAG, Bajaj Group, SKS Microfinance, and Shriram Finance, which already have NBFCs and have been eyeing banking licences, thereby increasing competition and fostering better quality service.
Pros: The idea behind the NOHC, which will hold the bank and other financial services of a group, is to demarcate the financial services of the group - which are overseen by regulators - from its other activities. The NOHC will hold at least 40 per cent of the bank's paid-up capital with a five-year lock-in. Experts believe these steps will prevent systemic risk and attract only serious long-term players. "The RBI's cautious approach is a positive step from the customers' point of view," says Shachindra Nath, Group CEO, Religare Enterprises, which is also keen to enter banking. To ensure a high level of corporate governance, NOHCs should have at least 50 per cent of their boards made up of independent directors.
Cons: The draft requires new banks to meet the same priority sector lending targets existing domestic banks have to follow - 40 per cent of their loans should go to agriculture, rural, small and medium enterprises, and micro-lending sectors; they should open at least 25 per cent of their branches in rural areas - villages with a population of less than 10,000; they should list themselves on stock exchanges within two years of obtaining their licences, and more. Market observers say the purpose behind setting up new banks is to promote greater financial inclusion, and enforcing the norms set for old banks on them will not serve the purpose. RBI should give some leeway to the new players to come up with novel solutions on the key issues banks confront.
