The Reserve Bank of India is considering a 50 per cent cap on foreign investment in new banks with a 10-year lock-in and keeping out corporate groups involved in real estate business.
Banks are now allowed to have up to 74 per cent foreign shareholding, of which 49 per cent can be held by foreign institutional investors and 24 per cent by non-resident Indians. The government treats banks with more than 50 per cent foreign shareholding as non-resident-owned banks.
In its discussion paper on new private sector banks released today, the central bank has also suggested a higher capital requirement than the existing Rs 300 crore for new bank licensees.
RBI, which has sought feedback on the proposals by September 30, plans to give only a limited number of licences to promote financial inclusion and inclusive growth, while increasing competition and reducing costs.
Shares of major NBFCs today zoomed as much as 14 per cent after release of the discussion paper. Religare Enterprises led the gains and soared 13.8 per cent to hit a year high of Rs 472.70 on the Bombay Stock Exchange. The company is among the entities like Reliance Capital, India bulls, IL&FS, IDFC, IFCI and Aditya Birla Nuvo, that are reported to be mulling entering the banking space.
Minimum capital requirement, shareholding of promoters and foreigners, permitting industrial and business houses, and non-bank finance companies and a business model are among the areas where RBI has sought debate and feedback before it finalises the new rules.
Corporate groups seeking bank licences should have diversified shareholding and a bank promoted by the group should be ‘ring-fenced’ from other group companies, RBI suggested. Among other safeguards, boards of these companies must have a majority of independent directors and the chairman should be a part-time post.
“The paper ensures that only serious players with experience can apply for a banking licence,’’ said Sanjeev Bajaj, managing director at Bajaj Finserv Ltd. “RBI has realised that there is a huge potential and need for increasing banking presence. So, it has agreed to open up the next round of licences.’’
Companies planning to set up a bank may be allowed to acquire Regional Rural Banks as an intermediate step before they get a full-fledged licence, RBI has suggested. The central bank has disfavoured non-bank finance companies engaged in real estate activities, even as it expressed satisfaction at the conversion of one NBFC into a bank.
RBI said the minimum capital of a new bank must be higher than Rs 300 crore, while seeking a debate on the need for minimum capital of Rs 500 crore that could be raised to Rs 1,000 crore. In 2001, RBI had set a minimum capital requirement for banks at Rs 200 crore, which was to be increased to Rs 300 crore in three years.
RBI also opened discussions on the option of permitting promoters to hold on to as much as their initial 40 per cent stake. In its earlier norms, promoters, after a five-year lock in, had to dilute stake to below 10 per cent. RBI described its approach in 2001 as cautious for keeping out corporate houses and limiting ownership stake of companies owned by them to 10 per cent.
RBI also listed out rules in 10 global jurisdictions and nowhere found clear-cut laws banning industrial houses from owning or running banks.
Though the discussion paper did not say whether the 50 per cent cap on foreign investment in private sector banks should apply to the new banks only, or will hold true for the existing ones as well, some industry experts said the new cap could be for all.
KPMG Financial Services Tax Leader Punit Shah said: “It is not clear. However, it is possible that even the existing banks will have to comply with the new cap over a period of time for a level playing field.”
Janmejaya Sinha, Chairman – Asia Pacific of Boston Consulting Group, said RBI could fix the minimum capital requirement somewhere between Rs 500 crore and Rs 1,000 crore. But he would favour a higher cap of Rs 1,000-1,500 crore as that will attract only the really serious players.
Ashvin Parekh, head of financial services for India at Ernst & Young, said industrial houses with a predominant presence in financial services are the most likely to be eligible and that the document suggests the central bank may issue at least eight new licences.
The global financial crisis signalled the need to have strong domestic banks, avoiding large and complex banking structures, improving level and quality of capital, risk management and governance standards, RBI said.
RBI may seek a business model from the new applicants with targets for reaching areas with population less than 50,000, especially in the under-banked areas, among others.
Under the 2001 guidelines, banks were asked to give a business focus, regional spread, viability and were expected to meet the 40 percent priority sector lending targets, the discussion paper said. New banks then were also required to open 25 percent of their branches in rural and semi-urban areas.
The discussion paper follows Finance Minister Pranab Mukherjee’s announcement in the Budget speech that RBI may give more banking licences to private sector companies. The last private banking licences were issued in 2003.