The Reserve Bank of India
The holding company structure is described in the draft guidelines that the central bank has sent to the finance ministry last week. The guidelines are not final but provide a clue to its thinking. The norms governing new banks will be made public once the finance ministry responds.
Such a structure is aimed to ring fence the regulated financial services activities of an industrial house, including the new bank, from other activities such as manufacturing and trading that are not regulated by financial sector regulators.
In his Budget speech, the finance minister had said the Reserve Bank of
A number of conglomerates such as the Tatas, the Aditya Birla Group and Mahindra and Mahindra are keenly awaiting final guidelines, which are likely to be released by the end of this month, as many have shown interest in starting a bank in
The draft guidelines sent to the finance ministry stipulate that companies and promoters considered eligible for banking licence by RBI would have to set a wholly-owned non-operative holding company (NOHC), which needs to be registered as a finance company with RBI, and will be governed by a separate set of prudential guidelines.
But the draft rules say groups that derive 10% of their 'income' from broking or real estate shall not be eligible. This may hit the plans of financial services companies with big brokerage units seeking to enter banking.
NOHC will not be permitted to borrow funds for investing in group companies or "undertake activities which banks are permitted to undertake departmentally". Simply put, it will just be a vehicle to hold investments in all regulated financial sector entities on behalf of the promoter/promoter group for regulatory and prudential comfort.
The central bank has also suggested that the proposed banks will have to maintain arm's length relationship with promoter group entities, their business associates and their suppliers and customers.
"The whole concept behind these draft guidelines is to ensure that systematically important financial institutions, which are granted banking licences, do not endanger the banking institution in the country," said a senior official involved in framing the guidelines.
To ensure this, it has suggested that the exposure of the bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank. All exposures to promoter group entities will have to be approved by the board.
The central bank also suggests that new banks should have a minimum capital 500 crore and that it should be listed within two years while capping foreign shareholding at 49%. The bank board should have a majority of independent directors. The source of promoters/promoter group's equity in NOHC should be transparent and verifiable.
The Reserve Bank has also proposed that the non-operative holding company will hold a minimum of 40% of the paid-up capital of the bank, which will be locked-in for a period of five years from the date of licensing.
"To promote corporate governance we have suggested that the shareholding of NOHC should be brought down to 15% within 10 years and retained at this level," he said. NOHC will not be permitted to set up any new financial services entity for at least three years.
In case a promoter or a promoter group with existing finance companies is considered eligible for a bank licence, they have two options. They can either promote a new bank or convert itself into a bank if it is undertaking banking activities.
If the finance company desires to convert itself into a bank, the proposed bank will be allowed to take over and convert the existing NBFC branches into banking branches only in tier-III to tier-VI centres. Existing branches in tier-I and tier-II centres may be allowed to convert into bank branches only with prior approval from RBI and subject to the existing rules applicable to domestic banks regarding opening of branches in these centres and also subject to maintaining 25% of the bank branches in unbanked rural centres.
In August, RBI had started the process by releasing a discussion paper inviting comments from corporates, banks, analysts and consultants. Another discussion paper was subsequently issued when the comments came in.
The central bank has asked the government to consider whether the 49% cap on FDI would require a change in the current foreign direct investment policy that is more liberal.
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