29 August 2011

RBI norms for new bank licenses

The Reserve Bank of India released on its website today, the Draft Guidelines for “Licensing of New Banks in the Private Sector”.

Key features of the draft guidelines are (my comments are given below each para in bold):
(i) Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10 per cent or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible.
Comment: Why should entities having 10% or more stake in real estate construction or broker activities be excluded from eligibility. SEBI registered brokers are amongst the most regulated entities in the country - in fact being a SEBI registered broker should be an eligibility rather than a ground for ineligibility. Brokers also have a good sense of the economy and  the financial world. In any case,  the bank is to be created through a separate entity and it is not clear what risk will flow to the bank if over 10% of the holding of the parent, twice removed, does broking business. In fact if the holding company controlling both the banks and the brokerage are regulated by the RBI (see next point), that is a good thing for systemic risk.

(ii) Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group.
Comments: This is a positive development for systemic risk management - as RBI gets a better handle of the financial sector and not just banks and some types of non-banks.

(iii) Minimum capital requirement: Minimum capital requirement will be ` 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank.
Comment: Not clear why RBI want both a minimum  shareholding now and a maximum shareholding later. If it wants diffused shareholding - there should be a maximum in both cases. I assume RBI wants a promoter at this stage so it can have someone accountable.

(iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.
Comment: The foreign shareholding should be uniform across both existing banks and new banks.

(v) Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.
Comment: Having independent directors is only a miniscule part of corporate governance. RBI needs to do a deep qualitative filtering to allow fit and proper persons to enter the systematically important arena of banking. While this may not satisfy some as not based on objective criteria, the RBI should take a call on who is fit and who is not - rather than merely giving licenses based on size, shareholding pattern, number of independent directors etc. 

(vi) The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)
Whatever is the standard – should be applied to all banks – not just new banks.

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