By Ruma Dubey

This is Rajan firing his last salvo and a good one at that!

Keeping up with the promised deadline of 1sy July to release clarified and re-clarified guidelines for ‘on tap’ Licensing of Universal Banks in the Private Sector and the new, clarified guidelines are good.

The biggest takeaway from this – all the big corporates, who dreamed of owning a bank too, well, their dreams have most certainly been crushed. The RBI has explicitly said that large industrial houses will be excluded as eligible entities but will be allowed to hold maximum of 10% stake. This does not come as a surprise at all because right from the beginning, RBI has never favored big corporates being entrusted with large amounts of public money as it could cause a fraud or a misuse in the future. Nothing wrong about that thought! Imagine if Mallya has owned a bank too in all this!

But the irking thought which comes in here – corporates are being allowed to hold 10% stake, so how do we know that they do they exert indirect control? This is a real risk which needs to be looked into as we Indians are the best in the world when it comes to finding loopholes and doing things their way, all “within the law”.

The RBI has permitted NBFCs, who have a good 10 year track record to also apply for a banking license. This is once again a good move as 10 years is a good time to establish oneself and sustain; transforming such proven NBFCs into banks is the step in the right direction.

And the best news – this is an “on tap” guideline, which means that issuing new banking licenses will be an ongoing thing, not something which is once in ten years.

Let us take a quick look at the highlights:

Resident individuals and professionals having 10 years of experience in banking and finance at a senior level are eligible to promote universal banks – this means an individual can also own a bank as long as he can fulfill the other criteria.

Large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10 per cent

Non-Operative Financial Holding Company (NOFHC) has been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities

Not less than 51 per cent of the total paid-up equity capital of the NOFHC shall be owned by the promoter/promoter group, instead being wholly owned by the promoter group

Existing specialised activities have been permitted to be continued from a separate entity proposed to be held under the NOFHC subject to prior approval from the Reserve Bank and subject to it being ensured that similar activities are not conducted through the bank as well.

the universal bank has to list on exchanges within 6 years of business commencement and must have realistic and viable business plan. 

The validity period of the in-principle approval is 18 months.

The one clause which many felt was a put-off though remains – a 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 rider, for 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 as financial inclusion is the priority.

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.

This transformation of the Indian banking sector is the one legacy for which Rajan will be remembered long after he fades away from public memory.