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The Reserve Bank of India
has been treading
cautiously with regards to
banking licences. The
numbers speak for themselves. In the
past two decades, only 12 new
banking licences have been granted to
the existing players.
However, it is now a well established
fact that a number of corporate
players are seeking to make a
footprint in the banking industry.
With the Finance Minister’s 2010
budgetary announcement of granting
new banking licences, hopes have
only built up further. Conglomerates
such as the Tatas, Birlas, Ambanis,
and Mahindras are all in the fray.
The Non Banking Financial
Companies (NBFCs) such as L&T
Finance Holdings, Srei Finance,
Sundaram and Bajaj Finserv are also
believed to be in the race.
RBI, however, is still holding the
cards close to its chest. It was only at
the fag end of August that it came out
with draft guidelines with regards to
new banking licences. Even then it
was a measured move.
The RBI Governor D Subbarao made
no bones about the fact that in the
current framework of rules and
regulations, corporate entities, if
allowed to open banks, would have a
ready source of funds.
Nevertheless, it has put out the draft
guidelines that are stringent to say the
least. Is the RBI justified in making
such cautious moves? We take a
closer look at some of the major
suggestions made by the RBI.
OWNERSHIP ISSUES
Firstly, the RBI said that any existing
financial company will be allowed to
transform into a bank or an
independent promoter can start from
scratch as long as they have the
minimum initial capital of `500 crore,
a minimum capital adequacy ratio of
12% and the ownership and
management is different for the
promoter company and the bank.
Besides, the promoter seeking to set
up a bank is required to have an
impeccable track record of 10 years,
sound credentials and must have run
the business with integrity.
However, those entities that have
more than 10% income from real
estate, construction or broking will
not be considered eligible for the
opening of a new bank.
While the RBI is obviously thinking
about the risk factors involved in
businesses such as these, there seems
to be a strong objection to the same.
Brokers especially have strong views
against this. They say that they are in
fact the most regulated entities in the
country and are under strict vigil of
the Securities and Exchange Board of
India (SEBI).
Besides, those in the broking business
have a keen sense of finance and
economy and are perfect candidates
for opening up of new banks, some
experts argue.
In addition to this, the fact that the
bank is not only going to be removed
by a separate holding company and
will be directly under the jurisdiction
of the central bank, seems to be quite
an unfair clause.
HOLDING FORT
The RBI further stipulates that the
promoters have to set up a
wholly-owned non co-operative
holding company (NOHC). This
NOHC will, in turn, be the holding
company for the new bank as well as
other financial subsidiaries of the
promoter such as life insurance,
general insurance or the asset
management company.
According to legal experts, this is a
smart move by the RBI as it not only
gets direct supervision of the bank but
also strengthens its holds on the
financial sector.
The RBI also says that the NOHC
shall hold at least 40% stake in the
banks and this has to be locked in for
a period of five years. If the
shareholding is beyond 40%, it has to
be brought down to 40% within a
maximum period of two years from
the date of licensing of the bank.
The shareholding of the NOHC
should further be brought down to
20% of the paid up capital within ten
years and 15% in 12 years and
maintained at this level, thereafter.
Although it is not clear why the RBI
is insisting on maximum shareholding
now and also minimum shareholding
over a period of 15 years, it may be
deduced that the maximum
shareholding clause has been
introduced since the RBI wants to
ensure accountability from the
promoter’s end in the initial years.
The other salient clause that the RBI
has suggested is with regards to
foreign holding. Any non resident
shareholding from FDI, FII or NRI
shall not exceed more than 49% for
the first five years from licensing the
new bank.
The RBI further stipulated that no non
resident shareholder would be
allowed to hold more than 5% of the
total paid up capital of the bank. This,
however, does not seem to provide a
level-playing field for the new banks
that will be set up as the existing
banks have a foreign shareholder
ceiling of 74%.
Beyond Market 10th Oct ’11 It’s simplified... 13