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RBI clarifies rules for new bank licences

Recently, the Reserve Bank of India clarified the much-awaited guidelines for new bank licences, allowing corporate and public sector entities with sound credentials and a minimum track record of 10 years to enter the banking business. It has only given 12 licences since 1993-94.

In the final banking guidelines, the RBI has stipulated that promoter will be permitted to set up a bank only through wholly-owned NOFHC (non-operative financial holding company). The guidelines also stated that all non-financial companies should be out of the holding company. The aim is to prevent the group company from diverting depositor's money with the bank to its group companies.

Given the dynamics, RBI will be directly evaluating the applicant. The banking regulator will ensure that the selected applicants are 'fit and proper' and there is no conflict of interest between the bank and group companies. However, the ‘fit and proper’ criterion is not clarified and will be a matter of judgment; hence the indicative criteria cannot be spelt out.


Deloitte View

Monish Shah, Senior Director, Deloitte Touche Tohmatsu India Private Limited believes that the “NOFHC model will ring-fence the bank and other financial service businesses from other group companies enabling better supervision by the RBI, as well as, capital protection. RBI wants to know the names behind the application and there would be fair bit of scrutiny on the shareholder promoters. He further adds that “the broad-based eligibility criteria will make it pertinent for the players to prove their strength in terms of management quality and business plan".

Further adding to the extension in the operationalizing period, from 12 to 18 months, he pointed out that "in all, RBI has given applicants nearly 2 to 2 and half years to comply with the NOFHC norms, which would work in favour of the licence seekers".