On-tap bank licence: RBI looks to tap NBFCs in growth push but not many will bite the bait
The Reserve of Bank of India has come out with the guidelines for on-tap bank licencing, paving way for those interested to seek licences whenever required. Earlier, the central bank gave out such universal bank licences only during specific periods. From 1990s, the RBI has given licences only thrice.
One of the key highlights of the much-awaited guidelines is that they have excluded large industrial houses as eligible entities from the purview, though they can invest in banks up to 10 percent.
The initial minimum paid-up voting equity capital for a bank should be Rs 500 crore and thereafter, the bank should have a minimum net worth of Rs 500 crore at all times.
Individuals/ professionals who are ‘residents’ and have 10 years of experience in banking and finance at a senior level and existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years can apply for the licence.
Representational image. Reuters
Further, “entities/ groups in the private sector that are ‘owned and controlled by residents’ and have a successful track record for at least 10 years, provided that if such entity/group has total assets of Rs 5,000 crore or more, the non-financial business of the group does not account for 40 per cent or more in terms of total assets/in terms of gross income” are also eligible promoters.
The applicant would have to pass the ‘Fit and Proper’ criteria. According to it, promoter/ promoting entity/ promoter group should have a past record of sound financials, credentials, integrity and have a minimum 10 years of successful track record.
The foreign shareholding in the bank would be as per the existing FDI. At present, the aggregate foreign investment limit is 74 percent.
“The licensing window will be open on-tap, and the applications…could be submitted to the RBI at any point of time,” the guidelines said.
The applications will be referred to a Standing External Advisory Committee (SEAC) to be set up by the Reserve Bank.
The validity of the in-principle approval issued by the RBI will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically.
Will NBFCs apply?
The RBI’s move seems like an attempt to tap into the resources of NBFCs at a time when the banks are straddled with huge NPA burden. The Rs 8 lakh crore stressed assets have become a millstone around the banking sector severely constraining their ability to fund economic growth.
However, it remains to be seen how many NBFCs will really apply for and pass the stringent licence test by the central bank.
A note by brokerage form Religare says the exercise is likely to to find only a few takers.
“We don’t see many NBFCs converting into banks given the stringent guidelines and statutory norms. Thus, though on-tap, licensing will be limited,” analysts Parag Jariwala and Vikesh Mehta said in the note.
Explaining the rationale behind the view, they have noted that the RBI has barred the entry of NBFCs that are part of a group with total assets of more than Rs 5,000 crore and has non-financial businesses accounting for over 40 percent of total assets or gross income. “This, in our view, will exclude NBFCs like Bajaj Finserv, MMFS (Mahindra and Mahindra Financial Services) and CIFC,” the brokerage note said.
Large industrial houses have also been disqualified as eligible entities, but have been permitted to invest up to 10% in banks. “This means that L&T Finance cannot convert into a bank with more than 10% holding by LT,” they said.
They have also pointed out that NBFCs will have to transfer all lending businesses to the new bank, with only specialised activities (like credit cards) to be done separately under a Non-Operative Financial Holding Company (NOFHC).
“We think large NBFCs would refrain from applying given the onerous statutory compliance requirements,” the note says.
Apart from these, the formation of an NOFHC has been made non-mandatory if promoters are individuals, and standalone promoting or converting entities. The brokerage sees this as positive for IDFC–IDFC Bank like structure. However, IDFC will have to apply for a special exemption since the rules don’t permit retrospective changes, the analysts note.
Also individual promoters, promoting entities, and converting entities that have other group entities, can set up the bank only through the NOFHC route. In such cases, the promoter or promoter group need to own a minimum 51% in the NOFHC.