PwC_alert_Feb_22,_2013_Licensing_of_New_Banks_in_the_Private_Sector[1].pdf

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The much awaited final guidelines for licensing of New Banks in the Private Sector

is released by the Reserve Bank of India (RBI) today i.e., 22 February 2013.

The RBI had released a Discussion Paper on 11 August 2010 and thereafter, the

draft guidelines on the licensing of new banks were released on 29 August 2011 by

RBI. The guidelines have been finalised taking into account feedback from

stakeholders, the media and the important amendments in December 2012 to the

Banking Regulation Act, 1949.

We have sum marised the key highlights of the final guidelines.

Executive Summary

The final guidelines lay down criteria with respect to Promoter eligibility, corporate

structure, foreign shareholding, corporate governance, prudential and exposure

norms; both on a stand-alone and a consolidated basis. The applicants will have to

prepare a detailed project report and a business plan giving details, amongst other

things, of how the applicant proposes to achieve financial inclusion.

There have been certain amendments vis--vis the draft guidelines including

amendments to promoter credentials. The express restriction on groups engaged in

activities such as real estate and capital markets including broking has been replaced

by an in-principle restriction on activities which are speculative in nature or subject to

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high asset price volatility. Further, NOFHCs have also been permitted to leverage

(subject to prescribed limits), which was not permitted in the draft guidelines.

Key highlights of the guidelines are as follows:

Eligible Promoters

The following entities / groups shall be eligible to promote a bank through

a wholly-owned Non-Operative Financial Holding Company (NOFHC)

o Private sector entities that are owned and controlled by residents;

o Public sector entities.

Promoters / Promoter Groups with an existing NBFC will also be eligible.

The terms Promoter and Promoter Group have been defined

exhaustively in the guidelines.

Fit and Proper criteria

Entities / groups should have a past record of sound credentials and

integrity, be financially sound with a successful track record of running

their business for at least 10 years.

Feedback may be sought from other regulators, and enforcement and

investigative agencies like Income Tax, CBI, Enforcement Directorate, etc.

Corporate structure

NOFHC to be the chosen mode of operation

Shareholding by promoters and/or relatives and/or entities in whichpromoters/relatives holds greater than 50% shares is capped at 10%

Group companies in which public hold not less than 51% should hold 51%

or more share capital

NOFHC should hold all regulated financial entities of the group (in which

the group has significant influence1 or control)

An activity that can be undertaken departmentally by the bank should be

undertaken by the bank itself

Certain activities2 are required to be conducted through a Joint Venture/

Subsidiary/ Associate which will be held by the NOFHC

Corporate structure should not impede ring fencing of the financial

services entities held by the NOFHC

Entities held by NOFHC should be regulated by respective regulators

NOFHC should not be permitted to set up new financial services entity for

three years, except where subsidiary/JV/associate of bank is legally

required or permitted by RBI

1As defined in Accounting Standard 23

2 Specialized activates like Insurance, Mutual Fund, Stock Broking, Infrastructure Debt

Fund, etc.


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Shares of the NOFHC shall not be transferred to any entity outside the

promoter group, any change in shareholding in excess of 5% should be

subject to RBI approval

Regulatory framework

NOFHC should be registered as NBFC with RBI and will be governed by aseparate set of directions issued by RBI

The financial entities held by NOFHC will be regulated by respectivefinancial sector regulators

Capital requirements

Minimum capital of 5 billion Indian rupees

40% of the paid up capital should be held by NOFHC which shall be lockedin for five years

If further equity capital is raised within five years, NOFHC shouldcontinue to hold 40%

Shareholding in excess of 40% should be brought down to 40% withinthree years, to 20% within 10 years and to 15% within 12 years

Bank should maintain a minimum capital adequacy ratio of 13% for at

least three years, subject to upward revision by RBI

On a consolidated basis, NOFHC should maintain a minimum capitaladequacy ratio of 13% for at least three years

To be publicly listed within three years

Foreign Shareholding

Aggregate foreign shareholding should not exceed 49% for first five years,

after which it will be as per the extant policy

For the first five years, no non resident, directly or indirectly should holdmore than 5% of voting equity

Prudential Norms

Should be applied both on stand-alone as well as consolidated basis

25% of the profits should be transferred to reserve fund each year3

Leverage up to 1.253 times of its paid up equity and free reserves ispermitted

NOFHC to adhere to Basel II/III4 norms as promulgated by RBI

3 Compliance on a standalone basis4 Compliance on Consolidated basis


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Exposure Norms

Particulars Within Promoter Group Outside Promoter Group

Investment Credit Investment Credit

Stand AloneNOFHC

Only toentities underit

Only toentitiesunder it

Prohibited Prohibited

ConsolidatedNOFHC

N.A N.A Restricted to10% ofconsolidatedcapital

As perexposurenorms

Bank Prohibited Prohibited Subject toprescribed

rules

As perexposure

norms

ResidualFinancialentities under

NOFHC

P ro hi bi te d P ro hibited Equityinstruments ofother NOFHCs

prohibited

Notexpresslyprescribed

in the finalguidelines

Others

Arms length relation with Promoter Group

Greater than 5% holding in the bank subject to approval by RBI

Greater than 10% holding in the bank other than by the NOFHC forbidden,

directly or indirectly

25% of new branches in unbanked rural areas with a population of lessthan 9999 as per the latest census

If greater than 40% of promoter group income/assets from non financialbusiness, RBI approval required for raising voting equ ity capital beyond10 billion Indian rupees for every block of 5 billion Indian rupees

In case of NBFC conversion/setting up bank, permission to convertexisting branches of NBFC to be granted only in tier 2-6 cities. Tier 1

conversion subject to RBI approval.

Way forward

The RBI has invited applications by 1 July 2013. Post initial screening by the RBI,the applications will be referred to a High Level Advisory Committee, which willcomprise of eminent persons with experience in banking, financial sector andother relevant areas.

This Committee will submit recommendations to RBI and RBI will take a finaldecision on grant of in-principle approval to aspirants. Amongst other things, theRBI will consider applicants who have an impeccable track record and entitieswhich are likely to adhere to best standards of customer service and efficiency. Thein-principle approval will be valid for a period of one year; and may be withdrawnby the RBI if any adverse fe atures are noticed within the Promoters or Promote rGroup.


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