Why NBFCs may not be interested in on-tap banking license
The Reserve Bank of India (RBI) came out on Monday with its guidelines for 'on-tap' licensing of universal banks in the private sector. A minimum start-up capital of Rs500 crore; minimum promoter holding of 40% (lock-in period five years); listing of the shares within six years; and promoters' holdings to be brought down to 15% in 15 years are some of the stipulations laid down by the regulator for obtaining a bank licence on tap. However, this may not find more takers, says a report.
 
In a research note, Religare Capital Markets Ltd, says, "We do not see many non-banking finance companies (NBFCs) converting into banks given the stringent guidelines and statutory norms. Thus, though on-tap, licensing will be limited."
 
"The RBI has barred the entry of NBFCs that are part of a group with total assets of over Rs5,000 crore and has non-financial businesses accounting for over 40% of total assets or gross income; this, in our view, will exclude NBFCs like Bajaj Finserv, Mahindra & Mahindra Financial Services Ltd (MMFS) and Cholamandalam investments and Finance Co Ltd (CIFC). Large industrial houses have also been disqualified as eligible entities, but have been permitted to invest up to 10% in banks. This means that L&T Finance cannot convert into a bank with more than 10% holding by Larsen & Toubro (L&T)," the report says.
 
The RBI has made it non-mandatory, the formation of non-operative financial holding company (NOFHC) if promoters are individuals, and standalone promoting or converting entities. "In our view," Religare says, "While this is positive for IDFC–IDFC Bank like structure, IDFC will have to apply for a special exemption since the rules do not permit retrospective changes."
 
However, the central bank has made NOFHC compulsory for promoters with group entities. RBI has clarified that individual promoters, promoting entities, and converting entities that have other group entities, can set up the bank only through the NOFHC route. In such cases, the promoter or promoter group need to own a minimum 51% in the NOFHC.
 
Under separate entity, only specialised activities would be allowed. NBFCs will have to transfer all lending businesses to the new bank, with only specialised activities, like credit cards, to be done separately under a NOFHC. "We think large NBFCs would refrain from applying given the onerous statutory compliance requirements," Religare says.
 
As per the guidelines, promoters or NOFHCs need to own a minimum 40% equity in the bank, with a lock-in period of five years. The holding needs to be brought down to 30% within 10 years and 15% within 15 years from the date of commencement of business of the bank. Foreign shareholding is permitted up to 74%, subject to the minimum promoter shareholding requirements.
 
The RBI also stated that senior-level individuals and professionals with 10 years of experience in banking and finance are eligible to promote a bank. This implies that senior managers of well-run banks in India may be in the fray to set up new banks.
 
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On tap banking licence: RBI says entity must have Rs500 crore capital, get listed in six years
The Reserve Bank of India (RBI) came out on Monday with its guidelines for 'on-tap' licensing of universal banks in the private sector. According to the guideline the initial minimum paid-up voting equity capital shall be Rs500 crore and thereafter the bank should have a minimum net worth of Rs500 crore at all times.
 
A minimum start-up capital of Rs500 crore; minimum promoter holding of 40% (lock-in period five years); listing of the shares within six years; and promoters' holdings to be brought down to 15% in 15 years are some of the stipulations laid down by the regulator on Monday for getting a bank licence on tap.
 
The bank shall open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per the latest census). The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks, RBI said.
 
As per the guidelines, promoters and the promoter group or non-operative financial holding company (NOFHC), as the case may be, should hold a minimum of 40% of the paid-up voting equity capital of the bank, which will be locked in for five years from the date of commencement of business of the bank.
 
The promoter group shareholding shall be brought down to 15% within 15 years from the date of commencement of business of the bank, the RBI said.
 
"The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank," as per the RBI guidelines.
 
As to the eligibility of the promoters the RBI said (i) Individuals/professionals who are 'residents' and have 10 years of banking and finance experience at a senior level;
 
(ii) Entities/groups in the private sector that are 'owned and controlled by residents' (as defined in FEMA Regulations) and have a successful track record for at least 10 years. However if such entity/group has total assets of Rs 50 billion or more, the non-financial business of the group does not account for 40% or more in terms of total assets or gross income;
 
(iii) Existing non-banking financial companies (NBFCs) that are 'controlled by residents' and have a successful track record for at least 10 years.
 
The RBI said the promoter of the bank should be 'fit and proper' with a past record of sound financials, credentials, integrity and have a minimum 10 years of successful track-record.
 
Promoters having other group entities shall set up the bank only through an NOFHC. Not less than 51% of the total paid-up equity capital of the NOFHC shall be owned by the promoter/ promoter group, as per the RBI guidelines.
 
No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC, the RBI has stipulated.
 
The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding of 10% or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.
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COMMENTS

MG Warrier

2 years ago

The RBI initiative to issue bank licences to those who are serious about doing the business of banking and can mobilise the resources needed and provide leadership to professionally manage new banks has not come a day earlier. Reserve Bank of India has been struggling to reconcile the interests of multiple institutional systems, broadly coming under commercial banks, cooperative banks and NBFCs, all trespassing each other’s operational jurisdictions and the competing claims for regulatory, supervisory and administrative controls from central and state governments and a variety of statutory bodies. Thank God, RBI has been there!
We had to wait 65 long years after passing of the Banking Regulation Act for Raghuram Rajan to arrive and tell us some ingenuous solutions to handle some of the tricky problems faced by Indian banking sector. He has opened many taps to ensure smooth and competitive functioning of the banking system and it will not be easy for RBI and GOI to take an easy diversion, as in the past. The institutional system that is emerging to take care of the banking needs in the present Indian context envisioned by RBI under his leadership will cover the entire banking business.
Ideally, all institutions which were hitherto ‘outside’ the definition of banks and were doing the business of banking in some pretext, will have to transform themselves into banks or transfer their banking business to banks. Consolidation of small private sector banks and professionalization of the working of cooperative banks (some initiatives in this direction have already been taken by states like Kerala) also need to be prioritised.

Bank strike success today: AIBEA
All India Bank Employees Association (AIBEA) has claimed that today’s bank strike against retrograde banking reform measures has been a total success. Banking services were affected throughout the country. The strike was called by United Forum of Bank Unions consisting of 9 trade unions of bank employees and bank officers. 
 
Some of the demands included not privatising banks, refraining from increasing private capital in public sector banks, recovery of bank loans through stringent measures and not consolidating and merging banks.  Other demands included not giving license to private hands to open small banks and payment banks and not to encourage Foreign Direct Investment (FDI) in banking sector. AIBEA cautioned that privatization will result in monopolizing of bank credit by big businesses which will deprive common people of accessing bank credit. They brought into attention the problem of bad loans amounting to more than Rs 13 lakh crore, majority of which are due from corporates, industrial and business enterprises.  They said that privatisation will not help solve this problem. “Privatisation may actually result in handing over our banks to some loan defaulter,” according to AIBEA.
 
There are 8,167 willful defaulters, who owe banks a cumulative amount of Rs. 76,685 crore.  AIBEA recommended that willful defaulters be dealt with more sternly and should take criminal action against these deliberate defaulters. The said, “But Govt. is showing velvet treatment to them by writing off their loans.  It is open loot of public savings.  This should be immediately stopped.” The recovery of these loans will enable banks to reduce service charges to customers, increase interest rate on deposits and extend loan to poor people at lesser rate of interest. Hence, recovery of these loans is essential especially in the current scenario where big corporate houses are being giving concessions, while students who cannot repay education loans if they don’t get jobs are being harassed. 
 
AIBEA said that the total deposits in the banks amounting to more than Rs116 lakh crore, included precious savings of the common people at large, which is social capital of the country. They further added that since public sector banks cater to priorities including agriculture, health and infrastructure, lending to these sectors will be affected if they are privatized. They called the banking reforms of the government ‘retrograde and anti-people’.
 
They concluded that the strike was to safeguard public sector banking and people’s savings. AIBEA and All India Bank Officers Association (AIBOA) are meeting in Hyderabad on 4 August and 5 August 2016 in order to chalk out further campaign and struggle programmes. 
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COMMENTS

Param

2 years ago

"Some of the demands included not privatising banks" - yet private banks also joined the strike. This is hilarious.
Interestingly, in Kolkata office of StanChart Securities was also closed, though it is not part of the StanChart bank.

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