Guidelines and important aspects

Guidelines and important aspects :

(A) Eligible Promoters

(i) Entities/groups in the private sector that are ‘owned and controlled by residents’ [as defined in Department of Industrial Policy and Promotion (DIPP)] and entities in public sector are eligible to promote a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

(ii) Promoters/Promoter Groups with an existing non-banking financial company (NBFC) are eligible to apply for a bank licence.

(B) ‘Fit and Proper’ criteria

Promoters/Promoter Groups should be ‘fit and proper’ in order to be eligible to promote banks through a wholly owned NOFHC. RBI would assess the ‘fit and proper’ status of the applicants on the basis of following criteria:

(a) Promoters/Promoter Groups should have a past record of sound credentials and integrity

(b) Promoters/Promoter Groups should be financially sound and have a successful track record of running their business for at least 10 years.

RBI may, inter alia, seek feedback on applicant Groups on these or any other relevant aspects from other regulators and enforcement and investigative agencies like Income Tax, CBI, Enforcement Directorate, etc. as deemed appropriate.

(i) Promoter/Promoter Group will be permitted to set up a bank only through a wholly-owned Non-Operative Financial Holding Company (NOFHC).

(ii) The NOFHC should hold the bank as well as all the other financial services entities of the Group regulated by RBI or other financial sector regulators. Only non-financial services companies/entities and non- operative financial holding company in the Group and individuals belonging to Promoter Group will be allowed to hold shares in the NOFHC. Financial services entities whose shares are held by the NOFHC cannot be shareholders of the NOFHC.

(iii) The general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally.

(iv) The NOFHC should not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of the NOFHC. However, this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specifically permitted by RBI.

(v) Only those regulated financial sector entities in which a Promoter Group has significant influence or control will be held under the NOFHC.

(vi) The Promoter/Promoter Group entities/individuals associated with Promoter Group should hold equity investment, in the bank and other financial entities held by it, only through the NOFHC.

(vi) Shares of the NOFHC should not be transferred to any entity outside the Promoter Group. Any change in shareholding (by the Promoter Group) with in the NOFHC as a result of which a shareholder acquires 5 per cent or more of the voting equity capital of the NOFHC should be with the prior approval of RBI.

(D) Minimum voting equity capital requirements for banks and shareholding by NOFHC

(i) The initial minimum paid-up voting equity capital for a bank should be ` 5 billion (` 500 crores). Any additional voting equity capital to be brought in will depend on the business plan of the Promoters.

(ii) The NOFHC should hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which should be locked in for a period of five years from the date of commencement of business of the bank.

(iii) Shareholding by NOFHC in the bank in excess of 40 per cent of the total paid-up voting equity capital should be brought down to 40 per cent within three years from the date of commencement of business of the bank.

(iv) The shareholding by NOFHC should be brought down to 20 per cent of the paid-up voting equity capital of the bank within a period of 10 years and to 15 per cent within 12 years from the date of commencement of business of the bank.

(v) The capital requirements for the regulated financial services entities held by the NOFHC should be as prescribed by the respective sectoral regulators. The bank should be required to maintain a minimum capital adequacy ratio of 13 per cent of its risk weighted assets (RWA) for a minimum period of 3 years after the commencement of its operations subject to any higher percentage as may be prescribed by RBI from time to time. On a consolidated basis, the NOFHC and the entities held by it should maintain a minimum capital adequacy of 13 per cent of its consolidated RWA for a minimum period of 3 years.

(vi) The bank should get its shares listed on the stock exchanges within three years of the commencement of business by the bank.

(E) Regulatory framework

(i) The NOFHC will be registered as a non-banking financial company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

(iii) The financial entities held by the NOFHC will be governed by the applicable Statutes and regulations prescribed by the respective financial sector regulators.

(F) Foreign shareholding in the bank

Where foreign shareholding in private sector banks is allowed up to a ceiling of 74 per cent of the paid-up voting equity capital, the aggregate non-resident shareholding from FDI, NRIs and FIIs in the new private sector banks should not exceed 49 per cent of the paid-up voting equity capital for the first 5 years from the date of licensing of the bank. No non-resident shareholder, directly or indirectly, individually or in groups, or through subsidiary, associate or joint venture will be permitted to hold 5 per cent or more of the paid-up voting equity capital of the bank for a period of 5 years from the date of commencement of business of the bank. After the expiry of 5 years from the date of commencement of business of the bank, the aggregate foreign shareholding would be as per the extant FDI policy.

(G) Corporate governance of NOFHC

Corporate governance and prudential exposure norms are important aspects of new bank policy; more so, in the context of allowing corporates to own banks. The guidelines for licensing of new banks deal on the subjects extensively. The guidelines mandate the NOFHC to have at least 50 per cent independent directors on its Board and they should have special knowledge or practical experience in economics, finance, accountancy, banking, insurance, law and some such fields. The NOFHC shall not have any credit and investment (including equity/debt capital) exposure to any entity belonging to the Promoter Group except those held under it and the new bank cannot take any credit and investment (including investments in equity/debt capital) exposure on Promoters/ Promoter Group entities or individuals associated with the Promoter Group or the NOFHC.

(H) Prudential Norms for the NOFHC

The prudential norms will be applied to NOFHC both on stand-alone as well as on a consolidated basis. Some of the major prudential norms are as under:

(i) NOFHC on a stand-alone basis

(a) Prudential norms for classification, valuation and operation of investment portfolio.

(b) Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances.

(c) The NOFHC for the purpose of its liquidity management can make investments in bank deposits, money market instruments, government securities and actively traded bonds and debentures.

(d) The NOFHC should closely monitor its liquidity position and interest rate risk. For this purpose, the NOFHC should prepare a structural liquidity statement (STL) and interest rate sensitivity statement (IRS).

(f) The NOFHC may have a leverage up to 1.25 times of its paid-up equity capital and free reserves. The actual leverage assumed within this limit should be based on the ability of the NOFHC to service its borrowings from its dividend income.

(ii) NOFHC on a consolidated basis

(a) NOFHC should maintain capital adequacy and other requirements on a consolidated basis based on the prudential guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF) issued under Basel II framework and Guidelines on Implementation of Basel III Capital Regulations in India, when implemented.

(b) The NOFHC should prepare consolidated financial statements and other consolidated prudential reports in terms of the Guidelines for consolidated accounting and other quantitative methods and in terms of Scope of Prudential Consolidation indicated under Basel III Capital Regulations.

(d) The consolidated NOFHC should prepare a structural liquidity statement (STL) interest rate sensitivity statement (IRS).

(I) Exposure norms

Exposure norms are to be observed as per the guidelines of the Reserve Bank of India from time to time.

(J) Business Plan for the bank

(a) Applicants for new bank licenses will be required to furnish their business plans for the banks along with their applications. The business plan will have to address how the bank proposes to achieve financial inclusion.

(b) The business plan submitted by the applicant should be realistic and viable. In case of deviation from the stated business plan after issue of licence, RBI may consider restricting the bank’s expansion, effecting change in management and imposing other penal measures as may be necessary.

(K) Other conditions for the bank

(i) The Board of the bank should have a majority of independent Directors.

(ii) Any acquisition of shares which will take the aggregate holding of an individual/entity/group to the equivalent of 5 per cent or more of the paid-up voting equity capital of the bank, will require prior approval of RBI.

(iii) No single entity or group of related entities, other than the NOFHC, should have shareholding or control, directly or indirectly, in excess of 10 per cent of the paid-up voting equity capital of the bank.

(iv) The bank should comply with the priority sector lending targets and sub-targets as applicable to the existing domestic banks. For this purpose, the bank should build its priority sector lending portfolio from the commencement of its operations.

(v) The bank should open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence.

(vii) The bank should operate on Core Banking Solutions (CBS) from the beginning with all modern infrastructural facilities.

(viii) The bank should have a high powered Customer Grievances Cell to handle customer complaints.

(J) Procedure for RBI decisions

Reserve Bank of India would consider many factors before issuing the licenses for the new private sector banks. At the first stage, the applications will be screened by RBI to ensure prima facie eligibility of the applicants. RBI may apply additional criteria to determine the suitability of applications, in addition to the ’fit and proper’ criteria prescribed by it. Thereafter, the applications will be referred to a High Level Advisory Committee to be set up by RBI.

The High Level Advisory Committee will comprise eminent persons with experience in banking, financial sector and other relevant areas. The constitution of the committee will be announced shortly. The High Level Advisory Committee will set up its own procedures for screening the application.

The Committee will submit its recommendations to RBI for consideration. The decision to issue an in-principle approval for setting up of a bank will be taken by RBI. RBI’s decision in this regard will be final. The validity period of in-principal approval for setting up of a bank is 18 months.

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