Sunday, February 24, 2013

RBI Guidelines for Licensing of New Private Sector Banks

The Reserve Bank of India (RBI) has issued a final set of guidelines for licensing of new banks in the private sector. These guidelines will becomes operational with effect from July 1, 2013 and applications under them for establishing new banks must be submitted to the RBI before that date.

These guidelines are based on the draft issued by the RBI in August 2011. Since then, the RBI has received and considered comments on the draft. Moreover, the Banking Regulation Act, 1949 underwent amendments in December 2012, which were a precondition to the effectiveness of the new regime.

The new guidelines lay down an enabling but strict regime for the private sector to apply for the establishment of banks. The broad structure and conditions of the new regime remain broadly similar to those indicated in the draft, and hence the analysis contained in our post of August 2011 largely holds good.

A principal change from the draft is that real estate and stock broking companies are no longer prevented at the outset from making applications to set up banks. The risks arising from these types of entities will be determined by the RBI subjectively while exercising its discretion in approving licenses for new banks. Moreover, by requiring promoter groups to set up banks through a non-operative financial holding company (NOFHC), the intention is to ring-fence the banking and financial activities of the group from other activities.

Other conditions, including those relating to minimum capitalization, foreign investment, priority sector lending and corporate governance are detailed in the guidelines, which are summarized here.

This is certainly likely to create a significant amount of interest among the business groups in India to foray into the banking sector, which might trigger a flood of applications. However, it is likely that only a few licences will in fact be granted in the near future, which may not necessarily cause a radical change in the industry, but would lead to some gradual progression in greater access to banking services and competition.

1 comment:

vswami said...

It is recalled, PC, the FM in his initial public announcement of such a proposal indicated to the effect that the novel idea should enable the realty sector to have its financing needs met by an exclusive wing of banking sector, divorced from the extant banking system. Be that as it may, the RBI’s follow-up move, if properly designed, implemented and gone ahead, with a sincerity of its laudable purpose, in a common man’s perspective, should help the PSBCs in being insulated to a great extent from the worrisome ‘risks’ and the resultant ‘NPAs’ thus far faced by them.
No need to specially say, - Over to concerned experts,hoping for matured thoughts and useful suggestions.