What the new banking licence guidelines mean- Business News

What the new banking licence guidelines mean

 Anand Adhikari        Last Updated: February 23, 2013  | 09:56 IST

Anand Adhikari
The decks have finally been cleared for corporate giants to enter the highly regulated banking space. Those in the queue include the Mahindras, Aditya Birla Group, Reliance Group (Anil Ambani) and Tatas. Brokerage houses, financial institutions and a real estate company are also in the reckoning.

Three years after then finance minister Pranab Mukherjee first made the announcement about allowing new private sector banks, the Reserve Bank of India (RBI) has finally begun the process of allowing new banks to apply for a licence.

The corporate structure suggested by the RBI is the holding company route, through what it calls a non-operative financial holding company (NOFHC). This entity will house all the financial services businesses of a group, including the banking, insurance, mutual fund and private equity businesses.

In order to safeguard the interests of deposit holders from any diversion of funds towards corporate houses, the RBI has made it clear that the holding company as well as the bank will not have any exposure to the promoter Group.

The bank will be prohibited from investing in any financial subsidiaries within the NOFHC. Also, the subsidiaries of the holding company will not be allowed to invest in each other's equity and debt instruments.

The subsidiaries of an NOFHC have also been barred from investing in the equity instruments of other NOFHCs.

In view of the new guidelines, many corporate houses will have to float a new holding company structure to become eligible for a banking license. The RBI will be looking at the 10-year track record of the promoter group to assess credentials and integrity.

The minimum equity capital requirement has been kept at Rs 500 crore, which will be easily met by most contenders. However, the promoter holding has been kept at a minimum of 40 per cent, which will be locked in for five years.

The bigger challenge will be in reducing the holding to 15 per cent within 12 years.

Banking, being a long-gestation business, actually starts paying back after 10-15 years. Therefore, selling a stake over the 12-year period to reduce the holding to 15 per cent could result in giving away the stake cheap.

There is also a requirement to compulsorily list shares on stock exchanges within three years of the commencement of business by the bank. This is good news as small investors would be able to share in the fruits of capital appreciation in a banking stock if - they stay invested over the long term.

Banks promoted by groups with 40 per cent or more of their assets and income in non-financial businesses will be required to take the RBI's approval to raise equity capital beyond Rs 1,000 crore for every block of Rs 500 crore.

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