Bank licence norms next week

The Reserve Bank of India (RBI) is set to release the draft guidelines on the entry of new banks next week. The norms will seek to minimise the downside risks of industrial houses promoting banks and ensure promoters of these new banks meet the “fit and proper” criteria, sources say.

Earlier this calendar year, the RBI had submitted the draft guidelines on new banking licences to the finance ministry for approval. The ministry cleared them with some changes recently, sources say.

The sources say the revised fit and proper criteria will make it difficult for any entity to get a licence if any case involving it is pending before any regulator. The RBI may also settle for Rs 1,000 crore as the minimum capital requirement for new banks. This will be five times the requirement when new banking licences were offered in 2001.

Sources say the ministry and the central bank have also resolved the differences over the proposed 74 per cent foreign direct investment (FDI) limit in new banks. However, the compromise formula could not be ascertained. In a discussion paper released in August last year, the RBI had suggested capping FDI in new banks at 49 per cent in the first 10 years, which could be subsequently raised to 74 per cent.

The move to increase the number of banks in the country was proposed by Finance Minister Pranab Mukherjee during his Budget speech for 2010-11 to expand financial services in rural centres.

According to sources, the RBI is looking to strengthen the governance guidelines for the fit and proper criteria on a continuing basis.

In the discussion paper, the central bank had proposed the background of promoters, directors and top executives of business houses planning to open banks be “rigorously examined”.

It also suggested a no-objection certificate for the promoters’ credentials, integrity and background be obtained from investigating agencies such as the Central Bureau of Investigation and the Enforcement Directorate, income tax authorities and regulatory agencies.

The central bank had said it was relatively easy to assess the fit and proper criteria for promoters of non-banking finance companies, as these institutions were already regulated by it.

A number of industrial and business houses, including Larsen & Toubro, Reliance Anil Dhirubhai Ambani Group, Aditya Birla Group and Shriram Group, have expressed interest in setting up banks.

Top executives of these institutions said they would firm up their plans after reviewing the guidelines on new banking licences. Besides the fit and proper criteria, norms on minimum promoter holding, size of capital and foreign shareholding will also play an important role.

In May, the finance ministry had proposed two types of banking licences: one for basic banking activities and another for full-fledged banking operations. However, there were few takers for basic banking licences, with most companies expressing interest only in full-fledged banking licences. It was not immediately known if the draft guidelines would also suggest two types of banking licences.