RBI's Universal Bank Guidelines 2025: Key Strategic Shifts In Governance, Capital And Innovation

Overview

The Reserve Bank of India (Universal Banks - Licensing) Guidelines, 2025 (“Guidelines”) represent a significant update to India's banking licensing system regime. These Guidelines are a revised consolidation of the guidelines issued on February 22, 2013¹, for Licensing of New Banks in the Private Sector and guidelines for ‘On Tap' Licensing of Universal Banks in the Private Sector, 2016². What's new this time is a most transparent process for private bank licences and an explicit voluntary transition path for differentiated banks such as Small Finance Banks (“SFBs”) that aspire to become Universal Banks.

Background

India's banking framework has evolved over the decades. In 2013, the Reserve Bank of India (“RBI”) released a policy discussion paper on Banking Structure in India: “The Way Forward”³. The discussion paper advocated reviewing the prevailing ‘Stop and Go' licensing policy and shifting towards a policy of ‘continuous authorisation', noting that such a framework would increase the level of competition and bring new ideas into the system⁴. In April 2014, the RBI announced it would work on the framework for ‘on tap' licensing. Accordingly, in May 2016, the RBI released draft guidelines for “On-Tap” licensing of Universal Banks in the Private Sector (“2016 Guideline”), with the final guideline issued on August 1, 2016⁵. These guidelines allowed eligible entities to apply for a universal banking license at any time rather than waiting for a specific window. However, the Indian financial sector has witnessed a major shift since 2016:

• Large Non-Banking Financial Companies (“NBFCs”) have expanded significantly.
• Rapid growth in large financial groups, many of which operate across several business lines.
• SFBs have grown, and some of them may now be suitable to become banks.
• There is a strong need for transparency, governance and capital discipline in the financial sector.

Who can become a Promoter under the Guidelines

The Guidelines specifies who can apply to set up a Universal Bank and sets detailed “fit and proper”⁶ standards. An individual promoter must be an Indian resident with at least ten years of senior-level experience in banking or finance. Private Sector entities or groups must be owned and controlled by Indian residents and must have a clean track record of at least ten years. Additionally, to maintain the financial nature of the business, if such a group's total assets are above INR. 5000 crore or more, then its non-financial business must not exceed forty per cent of its total assets or gross income. NBFCs can also apply, provided they are owned and controlled by Indian residents and have a ten-year successful track record. However, NBFCs belonging to groups where non-financial operations exceed forty per cent of total assets or income (when group assets exceed INR 5,000 crore) will not be eligible. Shell Banks are not eligible to apply⁷.

Furthermore, the regulator will evaluate whether the promoter or promoting entity has integrity, financial soundness, and a clean reputation. Both individuals and entities must require a minimum of ten years⁸ of experience in banking and finance at a senior level and have a proven track record. Preference will be given to promoting entities having diversified shareholding⁹.

Corporate Structure and the Role of Non-Operative Financial Holding Company

The Guidelines offers two structural routes. If the promoter is an individual with no other group entities, the bank may be established directly as a banking company under the Companies Act, 2013. But if group entities exist or are formed in the future, the promoter must operate through a Non-Operative Financial Holding Company (“NOFHC”)¹⁰. Where the promoter already has multiple group entities, an NOFHC is mandatory from the start. However, if the proposal is for setting up or conversion into a bank, any change in shareholding within the promoting or converting entity from the date of application to the RBI, as a result of which a shareholder acquires or transfers five per cent or more of the voting equity capital of the promoting or converting entity, shall be reported to the RBI¹¹.

Capital Requirements and Shareholding Rules

One of the most significant changes in the 2025 Guideline is the increase in the minimum paid-up voting equity capital requirement for the banks. The following changes have been introduced in the direction:

• Capital Requirement: The minimum capital requirement is INR 1,000 crore¹². Both the promoter NBFC and the resulting bank must meet this threshold in case of conversion.
• Capital Adequacy and Listing: The bank must maintain a capital adequacy ratio of 13 per cent of its Risk Weighted Assets for a minimum period of three years after the commencement of its operations and shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank.
• Initial Promoter Shareholding: Promoters or NOFHCs must initially hold at least 40 per cent of the bank's voting equity capital, which will be locked in for five years. If promoters' shareholding was already reduced earlier due to regulatory requirements, but remains above 26 per cent, the RBI may relax the requirement to restore the 40 per cent shareholding.
• Reduction of Promoter Holding: Over time, promoter holding must be reduced to 26 per cent within 15 years. During the first five years, if the bank raises more capital, promoters must maintain their 40 per cent share of the enhanced capital.
• Dilution Schedule: Furthermore, at the time of issue of licences, the promoter shall submit a dilution schedule, which will be examined and approved by the RBI. The progress in achieving these agreed milestones must be periodically reported by the banks and will be monitored by RBI.
• Promoter Exit Conditions: Whether a promoter ceases to be a promoter or could exit from the bank, after completing the lock-in period of five years, would depend on the RBI's regulatory and supervisory comfort or discomfort and Securities Exchange Board of India regulations in this regard at that time.
• Promoter Group Restrictions: Additionally, a person or entity belonging to the Promoter Group cannot be replaced during the lock-in period. Voting equity capital, other than the shareholding by promoters, promoters' group or NOFHC, could be raised through public issue or private placements.¹³

Corporate Governance, Prudential and Exposure norms

To strengthen the banking ecosystem, the Guideline introduces detailed governance rules. Standalone banks that are not part of the NOFHC structure must comply with the Banking Regulation Act, 1949 and all applicable corporate governance regulations. They must ensure independent directors form the majority within the bank, maintain proper committees such as Nomination and Remuneration Committees, and follow strict rules on income recognition, asset classification, and liquidity. To prevent conflicts of interest, banks are prohibited from lending to or investing in entities related to their promoters or shareholders holding 10 per cent or more¹⁴. They are also barred from investing in other NOFHCs. Exposure to other banks must follow crossholding exposure limits prescribed by the RBI. The Guideline mandates compliance not only at the individual level but also on a consolidated basis, as per the Reserve Bank of India (NOFHC) Directions, 2025¹⁵. Both the NOFHC and its financial subsidiaries, including the bank, must follow the applicable corporate governance standards, prudential requirements, and exposure limits because the same will be monitored by the RBI.

Business Plan and Other Operational Requirements

• Business Plan Requirement: Every applicant must submit a detailed business plan explaining how the bank will operate, grow, and support financial inclusion. The plan must be realistic, and the RBI may impose restrictions or penal measures if the bank significantly deviates from it.
• Indian Resident Control and Share Acquisition Approval: Indian resident control must always be maintained. Share acquisition of 5 per cent¹⁶ or more will require prior RBI approval.
• Arm's Length Relationship: The bank must also maintain an arm's length relationship with promoter entities and major suppliers or customers.
• Promoter Group Determination: RBI reserves the power to determine whether an entity is part of the promoter group.
• Priority Sector Lending: Newly established banks must comply with priority sector lending requirements from the start. They must open at least 25 per cent of their branches in unbanked rural centres with population up to 9,999¹⁷. They are expected to be technology-driven institutions with strong grievance redressal systems. Failure to comply with these requirements may attract penalties, including cancellation of the licence.
• NBFC Conversion or Promotion: For NBFCs, they may either convert themselves into a bank or promote a new one. In both cases, the NOFHC, the bank, or both should comply with all the requirements laid down in the Guideline.
• NOFHC Requirement: Under both options, the Promoters will have to set up an NOFHC if they have other entities in their group.
• Retention of Existing Branches: RBI may allow the NBFC to retain its existing branches as bank branches, subject to approval and compliance with branch guidelines.

Application and Approval Process

The Guideline lays down a clear, multi-level approval process. Applications must be filed on the PRAVAAH portal in the prescribed form along with supporting documents, financial details, ownership structures, and business plans. After submission, RBI will conduct an initial screening to check eligibility and promoter credentials. Eligible applications are then reviewed by a Standing External Advisory Committee (“SEAC”), comprising experts from the banking and finance sector. The SEAC has a tenure of three years. Its recommendations are forwarded to an Internal Screening Committee consisting of the Governor and Deputy Governors. This committee submits its views to the Committee of the Central Board (“CCB”), which takes the final decision¹⁸. Once in-principle approval is granted, the promoter has eighteen months to set up the bank. If not completed within that period, the approval lapses. RBI will also publish the names of applicants and approvals to maintain transparency. If an application is rejected, the applicant cannot reapply for three years but may appeal to the Central Board within one month.

The Voluntary Transition Path for SFBs

One of the most remarkable additions in the Guideline is the detailed voluntary transition pathway for SFBs wishing to become Universal Banks. The transition is not automatic; the SFB must apply formally and meet eligibility standards. The SFB must have at least five years of satisfactory performance, a net worth of at least INR 1,000 crore, and net profits in at least the last two financial years. There is no requirement that the SFB must have an identified promoter, but if an existing promoter, it will continue to be the promoter in the Universal Bank as well after conversion¹⁹. No new promoter can be added during the transition. There is also no new lock-in requirement for promoters; the existing dilution plan already approved by the RBI will continue. SFBs with a diversified loan portfolio will be preferred²⁰. The application and evaluation process for SFBs is the same as for other applicants, with additional documents listed in Annexe I of the Guideline.

Way Forward

The Guideline improves transparency and governance by introducing asset quality benchmarks, higher minimum paid-up voting equity capital, mandatory listing, and stricter rules for promoters. It formalises the application process through PRAVAAH and clarifies the ongoing applicability of NOFHC, which was earlier ambiguous. Most importantly, it offers a fully structured voluntary path for SFBs to graduate into Universal Banks, something missing in the 2016 Guidelines.

Footnotes

1. Preamble, Chapter I, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

2. Preamble, Chapter I, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

3. Banking Structure in India- The Way Forward Discussion Paper, By RBI, August 2013

4. Preamble, Chapter I, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

5. Preamble, Chapter I, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

6. C.2, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

7. C.1, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

8. C.2, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

9. C.2, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

10. C.3, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

11. C.3, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

12. C.4, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

13. C.4, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

14. C.7, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

15. C.7, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

16. C.9, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

17. C.9, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

18. E, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

19. Chater II-B, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

20. Chater II-B, Reserve Bank of India (Universal Banks- Licensing) Guidelines, 2025

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