BANKING LICENSE CLARIFICATIONS - INDEED, CHOICE OF THE FITTEST!
By Ruma Dubey
Thankfully, RBI kept to its promise of issuing the revised guidelines yesterday and that comes as a refreshing change as almost Govt work nowadays never ever happens on the scheduled date – it gets postponed, with another new date, another new date…. Taarik pe taarik pe taarik!
So not only did RBI keep up its date but it had put the guidelines on the public forum for debate and suggestions and it is based on the various feedbacks which it received that changes have been made. In all, RBI has received 443 queries from 34 individuals/ organisations. Upto the end of March 31, 2013, RBI had received 71 queries from 9 individuals/ organisations. Interactive method in such major decision making? Wish the Govt too follows this method….
Well, coming back to the one Govt machinery which works most efficiently, let’s looks at the clarifications issued by RBI.
Validity period of the in-principle approval
As per the guidelines for licensing of new banks in the private sector issued vide RBI Press Release dated February 22, 2013, the validity of the in-principle approval for setting up of the NOFHC / bank was one year from the date of issue and would lapse automatically, thereafter. Based on queries received from intending applicants, it realized that companies might require more time to sort out several complex issues pertaining to re-organisation of the existing corporate structure, restructuring of businesses and meeting the regulatory requirements. Keeping this in mind, RBI has extended the validity period of the in-principle approval from one year to 18 months.
Applicability of norms of other regulators
RBI, in its Feb’13 guidelines had made specific mandates for Non-operative Financial Holding Company (NOFHC) structure.
Under those, it has stated:
- NOFHC shall initially hold a minimum of 40% of the paid-up voting equity capital of the bank which shall be locked in for a period of 5 years, to be brought down to 15% within 12 years.
- Corporate governance of NOFHC - At least 50% of the Directors of the NOFHC should be independent directors.
- Prudential norms – Applicable to NOFHC both on stand-alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.
- The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.
Based on these, RBI stated that some of these requirements overlap with regulatory norms prescribed by other sectoral regulators like SEBI and IRDA. Thus there was confusion regarding adherence to different sector specific requirements. And based on the feedbacks, RBI has clarified that while the structure prescribed in the guidelines is the preferred structure, the intending applicants should approach the other financial sector regulators for bringing the entities regulated by them under the NOFHC. Their decision in this regard would prevail. Therefore, at the minimum, the proposed bank and all RBI regulated entities will necessarily be under the NOFHC.
The other guidelines remain the same and the deadline for submitting the application is getting closer – 1st July. Some companies are disappointed and were expecting more to come from the RBI regarding these clarifications. More importantly, most had expected RBI to change the guideline on rural banking – as per the guideline, bank is required to open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per the latest census). This many like the Shriram group felt would be tough. Many had also voiced challenges in terms of meeting the prudential guidelines, with respect to maintaining the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and also the fact that the bank, from the day that it gets the banking license will be subject to targets on lending to priority sector . But RBI has stuck to these guidelines and it seems unlikely that it will budge on these issues.
Clearly, only the fittest will survive. In 1991 when two licenses were issued for private sector banks, they were the best and there were really no corporate governance issues as such. But things have changed drastically since then. And it is but natural that stiff guidelines remain in place.
RBI is expected to get around 40 applications for the new banking license but only around 5 are expected to be approved. These are likely to be based on regions – Eastern, western, central, northern and southern.
L&T Finance, M&M Finance, Bajaj Finserv, Aditya Birla Nuvo, RIL stand a high chance. PSUs like LIC Housing, Power Finance, Rural Electrification are also strong contenders. Shriram Transport is also a bright candidate but as of now, it has stated that it needs to rethink of some of the guidelines.