8 things you should know about RBI's Universal Banks' licence

The Reserve Bank of India (RBI), on Thursday issued 'Draft guidelines for‘on tap’ Licensing of Universal Banks in the Private Sector. 

Under the new draft guidelines, RBI said that Indian residents and professionals with 10 years of experience in banking and finance will be eligible to promote universal banks. It also said, "Large industrial/business houses are excluded as eligible entities but permitted to invest in the banks to the extent of less than 10%."

The apex bank has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large. 

The bank had issued guidelines for licensing of new banks in the private sector on February 22, 2013. Reserve Bank issued in-principle approval to two applicants and they have since established the banks as per the licences.

Based on the experience of licensing two universal banks in 2014 and that of granting in-principle approvals for Small Finance Banks and Payments Banks, the bank has now worked out a new framework for granting licences for universal banks on a continuous basis, RBI said. 

Here are eight things you should know about this draft of guidelines for licensing of Universal banks:

Eligible Promoters

The eligible promoters should be existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and have a successful track record for at least 10 years.

Also, the promoters should be individuals / professionals who are ‘residents’ and have 10 years of experience in banking and finance.

'Fit and Proper’ criteria

The 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.

Corporate structure

The requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or standalone promoting/converting entities who/which do not have other group entities. 

The NOFHC should be owned by the promoter/promoter group to the extent of not less than 51% of the total paid-up equity capital of the NOFHC. 

Minimum capital requirement

The initial minimum paid-up voting equity capital for a bank should be Rs 500 crore. Thereafter, the bank should have a minimum net worth of ₹5 billion at all times.

The promoter/s and the promoter group/NOFHC, as the case may be, should hold a minimum of 40% of the paid-up voting equity capital of the bank which should be locked-in for a period of five years from the date of commencement of business of the bank.

Foreign shareholding in the bank

The foreign shareholding in the bank would be as per the existing foreign direct investment (FDI) policy subject to the minimum promoter shareholding requirement indicated in paragraph (IV) above. At present, the aggregate foreign investment limit is 74%.

Corporate governance prudential and exposure norms

The bank should comply with the provisions of Banking Regulations Act, 1949 and the existing guidelines on prudential norms as applicable to scheduled commercial banks.

Business plan for the bank

The business plan submitted by the applicant should be realistic and viable and address how the bank proposes to achieve financial inclusion.

Other conditions

The bank should get its shares listed on the stock exchanges within six years of the commencement of business by the bank. The bank should open at least 25% of its branches in unbanked rural centres (population up to 9,999 as per the latest census).

Final guidelines will be issued and the process of inviting applications for setting up of new universal banks in the private sector will be initiated after receiving feedback, comments and suggestions on draft guidelines, RBI said.

You can read the guidelines in detail here.