Redefining money guardians: Who should set up new banks

India Inc, NBFCs seek clarity on diverse issues in last year's draft guidelines

Bank aspirants in India Inc have asked for greater clarity on the central bank’s definition of promoters.

In feedback to the Reserve Bank of India (RBI) in response to the draft norms on new banks, companies have also sought more clarity on various issues thereon, from corporate structure to priority sector targets.

The draft norms were made public in August last year. These proposed several measures for considering applications to be issued a banking licence. Among these were the eligibility of promoters, the corporate structure, minimum capital requirement, corporate governance norms and business model, among others.

On eligibility of promoters, bank aspirants said there was need for a clearer definition of ‘real estate construction’, ‘well diversified group’ and ‘promoter group’.

The draft norms prescribed that promoter groups with diversified ownership, having a successful record for at least 10 years in running their businesses, would be eligible for a licence. It was also proposed that groups with 10 per cent or more income or assets from real estate and capital market activities, including real estate construction and broking activities, would not be eligible to promote banks.

Non-banking finance companies (NBFCs) said the requirement of having 25 per cent of branches in unbanked rural centres should be brought down to 15 per cent, to ensure a level field between existing and new banks. Suggestions were also made regarding exemptions on cash reserve ratio, statutory liquidity ratio and priority sector lending in the initial years for infrastructure companies getting converted into banks.

Feedback has also been sought on whether entities with indirect government control through shareholding by public financial institutions would be eligible to apply for a licence. Power Finance Corporation and Life Insurance Corporation had evinced interest in entering the sector.

“Many industrial and business houses have sought clarity on the time frame within which the group companies undertaking key business activities were to be listed… Certain business houses and NBFCs suggested a two-year period is too short a timeframe for listing of banks and a period of four to five years should be provided,” RBI said in the gist of feedback released on Tuesday.

NBFCs have suggested that advisory services to real estate funds, investment in construction of real estate property, mortgage loan/housing loan to customers and loans against property for business purposes be excluded for calculating exposure to real estate activity.

Regarding RBI’s proposal of a Rs 500 crore minimum capital requirement, banks and some institutions felt the requirement should be doubled. Business houses, on the other hand, wanted a greater timeframe for dilution of promoters’ stake to 40 per cent.

“Certain parties suggested the schedule for dilution of promoters’ shareholding be reckoned from the date of commencement of business instead of date of licensing of the bank,” RBI said.

On foreign equity in a bank, suggestions were made for 74 per cent foreign shareholding in the new banks, though NBFCs felt that restricting foreign shareholding to 49 per cent for the initial five years was not a deterrent.

FEEDBACK ON RBI’S DRAFT NORM FOR NEW BANK LICENCE
RBI'S PROPOSALS	FEEDBACK
Eligible promoters
Promoters need to be well diversified Promoters undertaking real estate activities on a significant scale ineligible	Clarity on definition of well diversified required Advisory to real estate funds, home loans, loan against property need to be excluded for calculating exposure to real estate activities
Corporate structure
Promoters to set up bank only through non-operative holding company (NOHC)	NOHC should not necessarily be wholly owned by promoters. Shareholding in NOHC need to be diversified
Capital requirements
Rs 500 crore must be the initial minimum capital 40% is figure that NOHC needs to reduce stake in bank within two years 15% is what NOHC needs to reduce stake in bank within 12 years	Rs 1,000 crore must be the initial minimum capital Three to five years should be the time frame 26-40% is stake that NOHC should be permitted to have
Foreign shareholding
49% is what foreign shareholding must not exceed for the first five years 5% is limit that foreign shareholder can hold directly or indirectly, individually or in groups	74% is the level of permission for foreign shareholding 25% is what the cap should be increased to
Corporate governance
At least 50% of directors at NOHC should be independent No financial services entity under the NOHC will be allowed to engage in any activity that a bank is permitted to do	A large number of independent directors in NOHC is redundant Two to three years or five to 10 years should be given to transfer businesses. Infra business should be allowed to run outside the bank
Business model
Business models must include financial inclusion plan	Financial inclusion target must be specified. Head office can be based in a non-metro centre
Other conditions
Two years is time for bank being listed 25% of the branches should be in unbanked rural centres Three years NOHC will not be permitted to set up any new financial services entity	Four to five years is period for extending deadline 15% of the branches should be in unbanked rural centres; norm is too onerous Remove this clause
Source: Reserve Bank of India

The draft norms had proposed formation of a non-operative holding company for the bank and that such a company could set up any new financial services entity.

While feedback was given to remove the three-year clause, some suggested if such a company was listed, it should not be made mandatory to list the banking entity.