In its monetary policy statement for 2014-15 on 1 April 2014,
the Reserve Bank of India (RBI) announced that it would work on a
framework for granting licences "on tap" to universal
banks, and for granting of differentiated bank licences with the
intent to "to expand the variety and efficiency of players in
the banking system while maintaining financial stability".
This statement had been preceded by a policy paper in August 2013,
which recommended reviewing the then prevailing policy of granting
licences for establishment of banks on a "stop and go"
basis, and instead put in place a continuous authorisation
The RBI issued a draft framework on 5 May 2016 for public
comment on granting licences to universal banks on a continuous
basis. The draft framework is based on the feedback received on the
policy paper, the RBI's experience with the granting of
licences to IDFC and Bandhan to establish universal banks, and its
experience with the granting of differentiated licences to payments
banks and small finance banks. Once issued, the framework will
replace the 2013 guidelines for licensing of new private sector
The draft framework prescribes the following entities as
eligible to apply for a licence to establish a bank: (a) existing
non-banking financial companies (NBFCs) that are
"controlled" by Indian residents, and that have a
successful track record of 10 years; (b) resident individuals that
have 10 years' experience in banking and finance; and (c)
private sector entities and groups that are owned and controlled by
residents, with total assets of at least `50 billion (US$750
million), a successful track record of 10 years, and where the
non-financial business income does not account for more than 40% of
total assets or gross income.
The eligibility criteria is considerably narrower than the 2013
guidelines, which allowed private and public sector entities, and
NBFCs, to apply for a licence to establish a bank. This provision
presumably reflects the intent of the RBI to allow only qualified
persons with a proven track record to establish banks and to avoid
conglomerates controlling or concentrating bank credit. This also
seems to be supported by the prescription in the draft framework
that companies or individuals directly or indirectly connected with
large industrial houses can hold only up to 10% of the equity of a
bank, and cannot have a controlling interest. Such persons will
also not be able to appoint a director on the board of the
While the 2013 guidelines made the requirement of a
non-operative financial holding company (NOFHC) mandatory, the
draft framework exempts applicants that are individuals, promoters
and standalone entities that do not have other group entities from
establishing an NOFHC as a holding company for the bank and other
financial services group entities. As the intent of the NOFHC
requirement is to ring-fence the banking and financial services
activities of a group from its other activities, this relaxation
shows welcome consideration of the RBI to the practical advantages
of allowing a simpler holding structure in certain cases.
An overarching theme of the draft framework is that applicants
must not only be eligible, but must also be serious about
establishing and operating a bank. For instance, while both the
2013 guidelines and the draft framework prescribe that all
applicants must submit their business plans along with their
applicants, and that the business plan must also address financial
inclusion, the draft framework goes a step further by prescribing
that in case a successful applicant deviates from its business
plan, the RBI may "consider restricting the bank's
expansion, effecting change in management and imposing other penal
measures as may be necessary".
The use of terms such as "successful track record" in
the draft framework, which have not been completely fleshed out,
gives the impression that the evaluation of an application will
still have considerable element of discretion. Perhaps it is the
intent of the RBI to retain this discretion so as to weed out
applicants that may not suit its long-term goal of diversifying
sources of bank credit and ensuring stability of the financial
Importantly, the draft framework clearly spells out the intent
of the RBI, that licences will be issued on a very selective basis,
to applicants with "an impeccable track record, and who are
likely to conform to the best international and domestic standards
of customer service and efficiency", and not just to all
applicants that fulfil the prescribed eligibility criteria.
This article was first published in the June 2016
issue of the India Business Law Journal (IBLJ) Journal.
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guide to the subject matter. Specialist advice should be sought
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