new banking licence norms impact-02!23!2013

8/22/2019 New Banking Licence Norms Impact-02!23!2013

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CAREs Analysis ofNew Banking Licenses Guidelines

The final RBI Guidelines for Licensing of New Banks in the Private Sector were released on 22nd

Feb 2013.

The guidelines have been released after feedback on the draft guidelines released in August 2011.CAREs

assessment of the guidelines indicates that RBI has considered a balanced and pragmatic approach

towards licensing of new banks. While the guidelines have now allowed a broader set of entities to enter

the banking space, there are sufficient checks and balances to ensure that the new banks follow

prudential norms and gradually move into mainstream banking with minimal systemic risk to the sector.

Key Takeaways

Ensuring financial discipline: RBI has ensured adherence to financial discipline by stipulating thepromotion of new banks by a Non-Operative Financial Holding Company (NOFHC) in the form of

a NBFC which will be regulated by RBI and will have to comply with the extant prudential

guidelines on standalone and consolidated basis.

Ring fencing of banking operations: One of the key principles of the guidelines is to ring-fencethe financial services business of the bank and its promoters from the risks of the group entities

of the promoters. The provisions for group exposure and ownership structure ensure that the

new banks will be focused on pure banking and financial activities that are insulated from any

group influence. Also, to reduce undue influence of a single promoting individual, a wider

shareholding has been encouraged by capping voting equity shares of individual shareholders in

NOFHC at 10 per cent. However, if companies are promoting the NOHFC, where public holds

more than 51 %, no such restriction has been imposed.

Tighter Regulation of New Banks till business model is tested: RBI has kept the regulatorycontrols more stringent for new banks (including a minimum 13% CRAR requirement) as the track

record of the new entities in banking will be observed over a period of time. This approach is in

line with what RBI had done in the past for new private sector banks who had to initially comply

with higher CRAR norms and then were gradually brought at par with all banks.

Risk based assessment of Speculative activities instead of blanket approach: From activitiesthat are considered negative for promoter / promoter groups - specific mention of broking and

real estate construction has been removed. Instead, activities which are speculative in nature or

subject to high asset price volatility is mentioned. This is a more prudent risk based approach

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wherein RBI may consider promoter groups on a case to case basis looking at the risk profile of

their businesses instead of any blanket classification of the group.

Greater flexibility in determining business structure: The guidelines also permit certainactivities, such as credit cards, primary dealers, leasing, hire purchase, factoring, etc., to be

conducted through separate financial entities. So a retail hire purchase NBFC of a promoter

group may continue its operations as a separate entity and need not transfer the business to the

bank. This is expected to help reduce the level of functional re-structuring in a group. Further

by allowing NBFCs to convert their branches in Tier 2 to 6 centres into bank branches, the

NBFC sector is expected to receive a fillip in expanding their business footprint.

Promoting Financial inclusion: The guidelines emphasise the need of banking inclusion byrequiring that the new banks to open at least 25 per cent of its branches in unbanked rural

centres areas and meeting of all priority sector targets.

RBIs subjective expertise continues with many qualitative parameters: As this is a criticalregulation with wide-ranging impact, RBI has put in place a lot of qualitative parameters that will

allow the regulator to take a view based on its judgment and expertise. The promoters should

have a past track record of sound credentials and integrity with successful track record of

running their business for at least 10 years


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Non-Operating Holding Finance Company (NOHFC)

Set up as NBFC with minimum Net worth of Rs. 500 crore Holding company of New Bank and All Financial Services

business of the Promoter

To be Regulated by RBI. Consolidated activities of NOHFCcovered

Ring-fenced from other activities of promoter

Financial Entities of Promoter Group

- Insurance / Mutual Funds / Factoring /

Broking / Primary dealers/ Hire Purchase

- Entities regulated by respective

regulators

Promoter / Promoter Group

Domestic private entities, public sector entities, NBFCs Financially sound with Track Record of at least 10 yrs Not in activities that are speculative or subject to high

asset price volatility

New Bank

- Regulated under extant and new

guidelines specific for it (like 13%

CAR)

- Should improve financial inclusion

-Promoter to set up NOHFC which in turn

will hold the New Bank

- Capital Structure of NOHFC regulated as

per Guidelines

- Pvt. sector entities to Apply to RBI by July

1 Promoter has to

transfer all

FinancialServices entities

under NOHFC

- NOHFC to set up Bank and own at least

40%- Bring ownership in bank down to 15% in

12 yrs from commencement of business.

Listed within 3.

NOHC to own all

Financial Sector Entities

of Promoter


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Contact:

Vijay Agarwal

Jt Gen [email protected]

91-022-67543416

Ashvini Patil Abhinav Sharma

Asst Gen Manager Asst Gen Manager

[email protected] [email protected]

91-022-67543431 91-022-67543508

Disclaimer

This report is preparedby the Banking Division of Credit Analysis & Research Limited [CARE]. CARE has taken utmost care to ensure

accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy

nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in

analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE

(including all divisions) has no financial liability whatsoever to the user of this report.
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new banking licence norms impact-02!23!2013

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