The Indian central bank on Monday said it will allow private sector companies that do not have large exposure in the real estate, construction or broking sectors to apply for licences to set up banks.
India has not issued a new bank licence since 2004, and the government wants more banks in order to increase access to banking services in a country where more than half of the households are outside the formal banking system.
In its draft guidelines, the Reserve Bank of India (RBI) said companies with a successful track record of at least 10 years will be eligible to form banks.
However, companies with 10 percent or more of their income generated from real estate, construction or broking activities in the last three years will not be eligible to apply for new bank licences, the central bank said.
The RBI said it will be selective in issuing licences. Other rules include a minimum capital requirement of 5 billion rupees ($109 million) and a limit of foreign shareholdings in start-up banks of 49 percent for the first five years. The limit for existing private sector banks is 74 percent currently.
Shares in some non-bank finance companies, expected to seek banking licences, rose sharply following the release of the draft rules.
Bajaj Finance ended 15 percent higher, while Reliance Capital, IFCI, SREI Infrastructure, Shriram Transport Finance and Mahindra & Mahindra Financial Services ended 2.5 to 11 percent higher.
Corporate houses such as the Tata group, the Anil Dhirubhai Ambani Group, the Bajaj group and the Mahindra group, all of which operate non-bank finance companies, are among those expected to seek banking licences.
The central bank has proposed that new banks be set up under a wholly-owned holding company, which would be registered as a non-bank finance company with the RBI under which the bank as well as all the other financial companies in the group would be registered, the RBI said.
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