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RBI shares the criteria for new bank license. It is strict and difficult to comply for many

By Shoaib Zaman

RBI shares the criteria for new bank license
The Reserve Bank of India (RBI) came out with its much awaited guidelines for new banking license. The only thing that can be said about the new norms are strict. It will inevitably be termed as hawkish in stance.

The main criteria that needs to be fulfilled to qualify for the banking license.

* Only private firms and NBFCs owned and controlled by Indian residents can seek banking license.

* Firms with at least 10% income or assets or both in from real estate, brokerage exposure are not eligible.

* Minimum paid-up capital will be Rs 500 crore.

* Also the banks are expected to be listed within two years.

* New banks will be set up only through non-operative holding company (NOHC).

* NOHC should hold at least 40% stake in the first five-years.

* Foreign shareholding capped at 49%

* Boards of new banks to have 50% independent directors

* New banks to have technology platform from the first day

* At least 25% branches should be in unbanked rural centers

* Minimum adequacy ratio set at 12%

* Exposure of new banks to the promoter group will not exceed 10% and group exposure capped at 20%

View: Looking at the edicts it is clear that the big companies like L&T, Tata and Reliance will find it troubling to apply for the banking license unless they change the structure of their companies and also the way they will control the banking arm of the group.

Edelweiss and Indiabulls are ineligible for their brokerage business, Indiabulls also has a real-estate arm too.

The Central bank has also recommended tougher capital rules for new lenders and mandatory share sales within two years as conditions for issuing new licenses will discourage many players.

Also the criterion that new lenders need to open at least one in four branches in rural areas with population of less than 10,000 people is also a enthusiasm dampener, considering that besides opening in rural areas the bank will need to give out 40% of their loan disbursement to priority sectors.


Then new banks' minimum capital requirement has been doubled compared to what was prescribed in 2004. Additionally foreign shareholding may be capped at 49 percent for new lenders for five years.

Putting together all of he above criteria and then looking at the fact that the new bank will face competition from State Bank of India, which accounts for almost a fourth of India"s loans, and ICICI Bank the largest among the private players will force people investors to think.

For regular investors the good part is there will be new banks that will be listed and this time it will be done within two-years of being formed. On the flip side, since the bank would have been in existance for only two years, it would be difficult to make much comment on the valuation of such banks or assess their management. Experts think it will not be easy to generate profit from the rural branches in the first two years.

It is to be seen who all will apply for a banking license and by the time it is applied how many changes the norm would have witnessed.

Read more about: rbi bank policy nbfc
Story first published: Tuesday, August 30, 2011, 11:18 [IST]
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