4 Jun 2013

Banking

Clarifications on new banking license; Statutory requirement

from Day 1; Some relaxation on PSL; RBI keeps discretion with

itself

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Reserve Bank of India (RBI) has issued clarifications with regards to the new

banking license guidelines released in Feb 2013. While these are only

clarifications and the deadline for applicants remains the same (at 01 July, not

indicated timeline for grant of in principal approval), the only change RBI has

made is that

New

Licensees will get 18 months instead of 12 months to

implement license.

RBI has also indicated that there is no pre‐determined number of licenses it has

in mind; it will be will be very selective while considering the applications for

new bank licenses. It will look for very high quality applications and it may,

therefore, not be possible to issue license to all the applicants meeting the

eligibility criteria.

Key Highlights: RBI has not granted any regulatory exemption to new aspirants:

1) All lending business which are allowed to be undertaken by the banks have to

be brought under the bank

2) All financial services activities, including activities which are regulated by

other regulators like Life/general insurance, merchant banking including other

regulated financial services entities (excluding entities engaged in credit rating

and commodity broking), in which the Promoter/Promoter Group has

‘significant influence’ or ‘control’ have to be held under the NOFHC.

3) CRR and SLR requirements: No forbearance for maintenance of CRR and SLR

will be granted by RBI, as these are statutory requirement for the banks. New

banks will have to maintain CRR / SLR from date of commencement.

4) Branch policy: A minimum of 25% of the bank branches in unbanked rural

centres (population up to 9,999 as per the latest census) required of all banks.

5) Regarding financial groups setting up banks, the existing NBFC must transfer

all regulated financial services business to a new company and shares in that

new company must be held by the NOFHC.

Priority Sector Lending targets: The newly set up banks will have time from the

date of grant of in‐principle approval to achieve the PSL target. As per the

current guidelines, the PSL targets (40% of adjusted net bank credit) for the

current year (April‐March) are computed based on the adjusted net bank credit

(ANBC) or credit equivalent of off‐balance sheet exposures (OBSE) of 31st March

of the preceding year (April‐March), whichever is higher, and the achievements

under the targets are reckoned on the position as on 31st of the succeeding

year. If ‘in‐principle’ approval is granted in February 2014, the bank has to

commence banking business latest by August, 2015. In that case, the bank has

to maintain PSL by March 31, 2017 on the ANBC base as of March 31, 2016 (the

reference date). In such a scenario, about 37 months would be available to the

Promoters/Promoter Groups to achieve the PSL target.

Post these clarifications, we believe that LTFH, MMFS, ABNL, Bajaj Finserv and

Tata Capital have a strong case for receiving a new banking licence. Among the

government entities, RECL/POWF, IFCI, Post office have fewer technicalities

involved to get banking license.

Nevertheless, two factors that can work against any NBFC to get converted or

start banking business include:

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(a) NBFC in the group cannot undertake any lending activity permitted for

banks.

(b) In case of conversion from NBFC to a bank, maintaining statutory

requirement (CRR, SLR and PSL) from the date of commencement of banking

operations will be a challenge.

Technical factors in specific cases:

(a) Shriram group: Creating a holding company and getting all financial services

under the same (of which two are listed and three are unlisted), statutory

requirement on the combined AUM of ~INR600b (SHTF and SCUF), after getting

a license both companies cannot do existing lending business permitted to

banks

(b) LICHF: LIC and LICHF will have to become subsidiary of NOFHC which we

believe is a complicated structure as LIC will come under the fold of NOFHC and

that NOFHC should be fully owned by GOI to retain 100% stake in LIC.

Will a Housing Finance Company or Housing Finance Activities of the promoting

company necessarily have to be brought under NOFHC ? In case the HFC is

substantially held by a Financial Sector Regulated entity, will RBI insist on the

investing company (financial sector entity) to come under NOFHC?

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Lending activities must be conducted from inside the bank. Therefore, the

housing finance activity of the HFC should be transferred to the bank under the

NOFHC. The financial sector regulated entity which holds the HFC substantially

will have to come under the NOFHC. In our view, this clause refers to LIC

Housing Finance and RBI clearly indicates that LIC will have to come under

NOFHC; will looks complex as well as difficult.

NBFC‐IFC framework was given shape to meet the increasing financing needs of the

Infrastructure sector which could not be met by banks within

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The general principle in this regard is that para‐banking activities, such as credit

cards, primary dealer, leasing, hire purchase, factoring etc., can be conducted

either inside the bank departmentally or outside the bank through subsidiary/

joint venture /associate.

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Activities such as insurance, stock broking, asset reconstruction, venture capital

funding and infrastructure financing through Infrastructure Development Fund

(IDF) sponsored by the bank can be undertaken only outside the bank. Lending

activities must be conducted from inside the bank. However, other regulated

financial services entities (excluding entities engaged in credit rating and

commodity broking) in which the Promoters/Promoter Group has ‘significant

influence’ or ‘control’ have to be held under the NOFHC and not under the bank

unless it is legally required or specifically permitted by RBI.

An existing NBFC is classified as Infrastructure Finance Company (‘IFC’) and has a

Public Finance Institution (‘PFI’) status. In such circumstances, would the RBI allow

the promoters of the ‘IFC‐PFI’ to continue its business on ‘as is where is’ basis under

the NOFHC?

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Infrastructure financing through Infrastructure Development Fund (IDF)

sponsored by the bank has to remain outside the bank, under the NOFHC.

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Infrastructure financing activities of the Promoters/Promoter Group through the

IFC have to be conducted from within the new bank held by the NOFHC. In our

view, this clearly refers to IDFC.

Where a group has one or more existing non‐deposit taking NBFCs, can the non‐

deposit taking NBFCs continue to exist until their existing book of business has been

4 Jun 2013

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Banking

wound down, or is it obligatory that all the activities of the non‐deposit taking NBFC

must necessarily be transferred immediately to the bank?

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The NBFCs must transfer their existing business to the bank if the bank can

undertake such activities and retain with itself the activities which the bank

cannot undertake from within.

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Both the bank and the NBFC, if required to retain with itself the activities which

the bank cannot undertake, will have to come under the NOFHC.

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Re‐organisation of business should be done within a period of 18 months from

the date of in‐principle approval or before commencement of the banking

business, whichever is earlier.

What are the Yardsticks to measure ‘financially sound’ and ‘successful track record’?

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The assessment of the ‘financial soundness’ and ‘successful track record’ is a

matter of judgment, and will have to be determined both on quantitative and

qualitative basis; and no specific yardstick/criteria has been spelt out.

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In making this judgment, consideration will be given to information obtained

from the regulators, and enforcement and investigative agencies like Income

Tax, CBI, Enforcement Directorate, etc. wherever considered appropriate.

Further, the applications received will be subjected to a multi‐layered evaluation

process, including the High Level Advisory Committee (HLAC).

What are the business model and culture considered by RBI to be misaligned with

banking model?

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‘Misaligned with the banking model’ would mean business model and business

culture which potentially puts the bank and the banking system at risk on

account of group activities such as those which are speculative in nature or

subject to high asset price volatility. It is not possible to exactly define

substantial contribution in terms of percentage, but it will be seen in the overall

context of business activities.

Reorganization of business and transfer of assets and liabilities to the new banks

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The receipt of applications for the new bank licence will close on July 1, 2013. At

the time of making applications, the Promoters/Promoter Groups will have to

furnish a road map and methodologies they would adopt to comply with all the

requirements of the corporate structure indicated in guidelines and realign the

business between the entities to be held under the NOFHC within a period of 18

months.

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After the ‘in‐principle approval’ is accorded by RBI for setting up of a bank, the

proposed bank has to start operations within 18 months. The actual setting up

of NOFHC and the bank, re‐organization of the Promoter Group entities to bring

the regulated financial services entities under the NOFHC as well as realignment

of business among the entities under the NOFHC have to be completed during

this period.

What activities can be carried out of a Bank? Activities that cannot be carried out of

a Bank but can be sponsored by a bank can rest in NOHFC

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All Lending activities that are allowed to a bank must be conducted from inside

the bank. Activities that have to be conducted from within the bank and para‐

banking activities by NBFCs in the group, such as credit cards, primary dealer,

leasing, hire purchase, factoring, etc., can be conducted either inside the bank

departmentally or outside the bank through subsidiary / joint venture /

associate.

4 Jun 2013

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Banking

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Branch Authorization Norms; Conversion of Tier 2 to 6 centers to a bank branch

automatically permitted

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The guidelines lay down the requirement very clearly. The conversion of existing

NBFC branches into bank branches would be automatically permitted for Tier 2

to 6 centres. The number of ultra small branches (USB) and number of branches

in Tier 2 to 6 centres would be as per the business plans of the

promoters/Promoter Group and requirement of the new bank.

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In the case of Tier 1 centres, conversion would only be allowed with the specific

prior approval of the RBI and subject to the existing rules/ methodology

applicable to domestic banks regarding opening of branches in these centres,

and also subject to maintaining a minimum 25% of the bank branches in

unbanked rural centres (population up to 9,999 as per the latest census)

required of all banks as specified in 2 (K) of the guidelines. For this purpose, RBI

would issue a letter of authorization under Section 23 of the Banking Regulation

Act, 1949.

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In cases of excess NBFC branches in Tier 1 centres, all such branches which

would carry out banking business may, with prior RBI approval, be converted

into bank branches. The excess over the entitled number of Tier 1 branches

would be adjusted against the future entitlements of the new bank within a

maximum period of 3 years from the date of commencement of business by the

bank. The remaining Tier 1 branches will have to be closed down at the end of

three years. The Promoters/Promoter Group have to provide a roadmap in this

regard.

Initial capital required for a bank; FDI in the new banks; Capital adequacy for the

NOFHC

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The new bank should have a minimum voting equity capital of INR5b. However,

where an NBFC is permitted to convert into a bank, it should have a minimum

networth of INR5b at all times.

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The aggregate FDI limit of 49% and individual non‐resident shareholding of 5%

will be applicable for the first five years. The Promoters/Promoter Group have

to comply with the requirement before the commencement of the banking

business. No additional time will be given for compliance with the FDI limits

applicable to the new banks.

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RBI would not provide any time window to comply with the capital requirement

at the consolidated level. No regulatory forbearance would be granted in this

regard.

Transfer of ECB and term borrowings/bonds from other entities to banks

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As transfer of assets and liabilities would be a part of the re‐organization of the

business of the group entities to comply with the provision of guidelines, more

particularly to comply with the NOFHC structure, the new bank would be

permitted to grandfather such liabilities till maturity, subject to the following

conditions:

4 Jun 2013

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Activities such as asset management, insurance, stock broking, asset

reconstruction, venture capital funding and infrastructure financing through

Infrastructure Development Fund (IDF) sponsored by the bank can be

undertaken only outside the bank.

However, other regulated financial services entities (excluding entities engaged

in credit rating and commodity broking) in which the Promoter/Promoter Group

has

a

‘significant influence’ or ‘control’ have to be held under the NOFHC and

not under the bank unless it is legally required or specifically permitted by RBI.

Banking

o

o

o

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The ECB/FCCB liabilities for the purpose of transfer to the new bank

should be frozen as on the date of in‐principle approval for setting up a

new bank;

The liabilities under ECB/FCCB that would be transferred to the new

bank together with other forex borrowing should not exceed 50% of its

Tier I capital;

In case these borrowings exceed the limit of 50% of Tier I capital due to

grandfathering of ECB/FCCB, no further borrowing would be permitted

till the aggregate borrowings are brought within the regulatory limit.

In

order to protect the interests of the depositors of the new bank,

while allowing grandfathering of term borrowings and other secured

liabilities taken over from NBFCs, RBI will impose additional capital

charge on the new bank, where it would allow creation/ continuation of

floating charges on the assets of the new bank.

Other important issues

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In genuine cases of delay in granting approval by regulators / Government, RBI

may consider granting extension of time for operationalising the bank.

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The commodity broking business is not considered to be regulated financial

services for the purpose of these guidelines, and entities in the Promoter group

which are carrying on commodity broking business cannot be held under the

NOFHC.

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The period of business plan is left to the applicants. The business plan should be

realistic and viable. It should address how the bank proposes to achieve financial

inclusion. It would be desirable to give business plan covering three to five

years.

The Promoters/Promoter Group would be issued the banking licence under

Section 22 of the Banking Regulation Act, 1949 for carrying out of banking

business by the Reserve Bank of India upon compliance with the terms and

conditions stipulated in the ‘in‐principle approval’ for setting up of a bank and

on completion of the process as mentioned above within the stipulated time

frame of 18 months from the date of in‐principle approval.

4 Jun 2013

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Banking

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