The Reserve Bank of India (RBI), the country’s central bank, recently released revised regulations for the licensing of new banks that allow private firms, public sector entities and non-banking financial companies (NBFCs) to establish banks through wholly-owned non-operative financial holding companies (NOFHCs). NBFCs may also convert into banks.
Eligibility requirements include initial minimum paid-up equity capital of INR 5 billion (USD 91 million) and a minimum capital adequacy ratio of 13 percent for the first three years. Foreign shareholding is capped at 49 percent for the first five years. The NOFHC must hold an initial minimum stake of 40 percent in the bank, which may decrease to 20 percent in 10 years and 15 percent after 12 years. A minimum of 25 percent of the bank’s branches must be established in “unbanked rural centres” with populations no greater than 9,999. The bank must open within one year of the license approval date and become listed on stock exchanges within three years of opening.
License applications will be screened by RBI with eligible applications to be referred to a “High Level Advisory Committee,” which will be established by RBI.
By Nicole Boyd, Research Associate
About Reserve Bank of India (RBI)
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.
Sources and Additional Resources:
Reserve Bank of India. “RBI releases Guidelines for Licensing of New Banks in the Private Sector,” http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=28191
Reserve Bank of India. “Guidelines for Licensing of New Banks in the Private Sector,” http://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2651
MicroCapital. February 25, 2013, “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) May Consider Raising Margin Cap on Microloans if MFIs Relinquish Priority-Sector Status,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-may-consider-raising-margin-cap-on-microloans-if-mfis-relinquish-priority-sector-status/
MicroCapital. December 19, 2012, “MICROCAPITAL BRIEF: Reserve Bank of India Projected to Issue Banking Licenses to L&T Finance Holding, Shriram Group, Mahindra & Mahindra Financial Services,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-projected-to-issue-banking-licenses-to-lt-finance-holding-shriram-group-mahindra-mahindra-financial-services/
MicroCapital. November 17, 2012, “MICROCAPITAL BRIEF: Reserve Bank of India Asks Rural Banks to Open 25 Percent of New Branches in Unbanked Areas,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-tasks-regional-rural-banks-to-extend-25-percent-of-operations-to-unbanked-areas/
MicroCapital Universe Profile: Reserve Bank of India (RBI) https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
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