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RBI releases Discussion Paper on Entry of New Banks in the Private Sector


1.1 The Union Finance Minister, in his budget speech for the year 2010-11 had announced that ‘The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licences to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.’

1.2 Subsequently, in line with the above announcement, the Governor, Reserve Bank of India indicated in the Annual Policy Statement for the year 2010-11 that the Reserve Bank will prepare a discussion paper marshalling the international practices, the Indian experience as well as the extant ownership and governance (O&G) guidelines and place it on the Reserve Bank’s website by end-July 2010 for wider comments and feedback. The Reserve Bank also noted that detailed discussions will be held with all stakeholders on the discussion paper and guidelines will be finalised based on the feedback. All applications received in this regard would be referred to an external expert group for examination and recommendations to the Reserve Bank for granting licenses.


2.1 It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that, for growth to be truly inclusive requires broadening and deepening the reach of banking.  A wider distribution and access of financial services helps both consumers and producers raise their welfare and productivity. Such access is especially powerful for the poor as it provides them opportunities to build savings, make investments, avail credit, and more important, insure themselves against income shocks and emergencies.

2.2 As of March 31, 2009, the Indian banking system comprised 27 public sector banks, 7 new private sector banks, 15 old private sector banks, 31 foreign banks, 86 Regional  Rural Banks (RRBs), 4 Local Area Banks (LABs), 1,721 urban co-operative banks, 31 state co-operative banks and 371 district central co-operative banks.

2.3 The average population coverage by a commercial bank branch in urban areas improved from 12,300 as on June 30, 2005 to 9,400 as on June 30, 2010 and in rural and semi urban areas from 17,200 as on June 30, 2005 to 15,900 as on June 30, 2010. The all India weighted average during the same period improved from 15,500 to 13,400.

2.4 Though the Indian financial system has made impressive strides in resource mobilization, geographical and functional reach, financial viability, profitability and competitiveness, vast segments of the population, especially the underprivileged sections of the society, have still no access to formal banking services.

2.5 The Reserve Bank is therefore considering providing licences to a limited number of new banks. A larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service. More importantly, it would promote financial inclusion, and ultimately support inclusive economic growth, which is a key focus of public policy. 

2.6 This discussion paper outlines past approaches, international experience, and considers the various costs and benefits of increasing the number of new banks as well as the pros and cons   of various policy parameters in licensing new banks.


3.1 Reserve Bank’s approach

3.1.1 When financial sector reforms were initiated in India in the early nineties, guidelines for licensing of new banks in the private sector were issued in January 1993 and subsequently revised in January 2001; the objective was to instill greater competition in the banking system to increase productivity and efficiency.

3.1.2 The revised 2001 guidelines by and large were still cautious in nature. Large industrial houses were not permitted to promote new banks. However, individual companies, directly or indirectly connected with large industrial houses were permitted to own 10 percent of the equity of a bank, but without any controlling interest.

3.1.3 An NBFC with good track records was considered eligible to convert into a bank, provided it was not promoted by a large industrial house and satisfied the prescribed minimum capital requirements, a triple A (AAA) or its equivalent, credit rating in the previous year, capital adequacy of not less than 12 percent and net Non Performing Assets (NPA) ratio of not more than 5 percent.

3.1.4 The initial minimum paid up capital was prescribed at Rs. 200 crore to be raised to Rs.300 crore within three years of commencement of business.

3.1.5 Promoters were required to contribute a minimum of 40 percent of the paid up capital of the bank at any point of time, with a lock-in period of five years. However, if the promoter's contribution to the initial capital was more than the minimum 40 percent, they were required to dilute their excess stake after one year of the bank's operations.

3.1.6 Non Resident Indians (NRIs) were permitted to participate in the primary equity of a new bank to the maximum extent of 40 percent. However, the equity participation was restricted to 20 percent within the above ceiling of 40 percent, in the case of a foreign banking company or finance company (including multilateral institutions) acting as a technical collaborator or a co-promoter.

3.1.7 Banks were required to maintain an arm’s length relationship with business entities in the promoter group and individual company/ies investing upto 10 percent of the equity.  They could not extend any credit facilities to the promoters and company / ies investing up to 10 percent of the equity. The relationship between business entities in a promoter group and the bank had to be of a similar nature as between two independent and unconnected entities.

3.1.8 The shares of the bank had to be listed on a stock exchange.

3.1.9 Capital adequacy ratio of the bank had to be 10 percent on a continuous basis from the commencement of operations.

3.1.10 Banks were obliged to maintain upto 40 percent of their net bank credit as loans to the priority sector.

3.1.11 Banks were obliged to open at least 25 percent of their total number of branches in rural and semi urban centers.

3.2 Reserve Bank’s experience

3.2.1 10 new banks were set up in the private sector after the 1993 guidelines and 2 new banks after the 2001 revised guidelines. Out of these, four were promoted by financial institutions, one each by conversion of co-operative bank and NBFC into commercial banks, and the remaining six by individual banking professionals and an established media house.

3.2.2 Out of the four banks promoted by individuals in 1993, only one has survived with muted growth. One bank has been compulsorily merged with a nationalized bank due to erosion of networth on account of large capital market exposure. The other two banks have voluntarily amalgamated with other private sector banks over a period of 10 to 13 years due to the decisions of the majority shareholders arising out of poor governance and lack of financial strength.

3.2.3 Out of the remaining six banks that were licensed in 1993, one bank promoted by a media group has voluntarily amalgamated itself with another private sector bank within five years of operations and four banks promoted by financial institutions have either merged with the parent or rebranded and achieved growth over a period of time. The bank that was converted from a Cooperative bank has taken some time in aligning itself to the commercial banking and is endeavoring to stabilize itself.

3.2.4 The two banks licensed in the second phase have been functioning for less than 10 years and their transition from the settling stage has been fairly smooth.

3.2.5 The experience of the Reserve Bank over these 17 years has been that banks promoted by individuals, though banking professionals, either failed or merged with other banks or had muted growth.

3.2.6 Only those banks that had adequate experience in broad financial sector, financial resources, trustworthy people, strong and competent managerial support could withstand the rigorous demands of promoting and managing a bank.

3.2.7 The experience with small banks has not been encouraging, Out of the six Local Area Banks licensed, only four remain. The license of one has been cancelled due to serious misrepresentation / concealment of facts at the time of granting of licence and another has been merged with a bank on account of bad governance and unfit management. Of the remaining four, two though  continuing to maintain minimum capital, liquidity and profitability, have not progressed much. The remaining two are functioning satisfactorily but their growth has been restrained due to inadequacies of the small bank model.

3.2.8 The Local Area Bank model has inherent weakness such as unviable and uncompetitive cost structures which are a result of its small size and concentration risk. Local Area banks are required to confine their operations to a small area of three districts. This concentration exposes the banks to the risk of adverse selection.  Further, the size of operations and also the locational disadvantage of these banks act as a constraint to attracting and retaining professional staff as well as competent management. Corporate governance standards in these banks are also found wanting partly because of their concentrated ownership.

3.2.9 The experience with other small banks i.e. urban co-operative banks, and small deposit taking NBFCs is similar. Low capital base, lack of professional management, poor credit management, and diversion of funds have led to multi-faceted problems.

3.2.10 As such, in the interest of the depositors and the financial system as a whole, and also due to the thrust on the financial inclusion, banks should be required to start with sufficient initial capital. Further, strong capital base would also ensure that the banks withstand any adverse conditions in the financial sector as well as the economy.


4.1 High Level Investment Commission

The February 2006 report of The High Level Investment Commission, constituted by the Government of India in December 2004 with the objective of enhancing both foreign and domestic investment levels in India, has, among other things, recommended permitting ownership in Indian banks of up to 15 percent by Indian corporates, and also to increase limits of holdings by any one foreign bank up to 15 percent in private banks.

4.2 High Level Committee on Fuller Capital Account Convertibility

The July 2006 report of The High Level Committee on Fuller Capital Account Convertibility, constituted by the Reserve Bank of India in March 2006 under the chairmanship of Shri S. S. Tarapore, has recommended that RBI should evolve policies to allow, on a case by case basis, industrial houses to have a stake in Indian banks or promote new banks. The policy may also encourage non-banking finance companies to convert into banks. It has also recommended that after exploring these avenues until 2009, foreign banks may be allowed to enhance their presence in the banking system.

4.3 Committee on Financial Sector Reforms

The September 2008 report of The High Level Committee on Financial Sector Reforms, constituted by the Government of India in August 2007 under the chairmanship of Dr. Raghuram G. Rajan, has recommended allowing more entry to private well-governed deposit-taking small finance banks with stipulation of higher capital adequacy norms, a strict prohibition on related party transactions, and lower allowable concentration norms (loans as a share of capital that can be made to one party). Such measures would also increase financial inclusion by reaching out to poorer households and local small and medium enterprises.

4.4  Lessons from the recent global financial crisis

4.4.1 A constellation of regulatory practices, accounting rules and incentives magnified the credit boom ahead of the recent global financial crisis. The same factors accelerated the downturn in markets and intensified the crisis. Macroeconomic stability and financial stability were generally treated as separate and unrelated constructs with the former focusing on preserving low and stable inflation, while the latter dealing with the firm-level supervision of the formal banking sector. In this process, not only was the growing shadow financial sector ignored, but also factors such as the interconnectedness within the complex financial system, especially between banks and the financial institutions, the systemic risk arising out of too-big-to-fail entities and system-wide liquidity needs.

4.4.2 Though the epicentre of the crisis lay in the sub-prime mortgage market in the US, it was transmitted rapidly throughout the globe, destabilizing financial markets and banking systems. The crisis eventually impacted the broader macro-economy, affecting economic growth and employment throughout the world.

4.4.3 The magnitude of this crisis has clearly signaled the need for major overhaul of the global financial regulatory architecture, the importance and need for improving quality and level of capital, risk management and governance standards, having strong domestic (indigenous) banks, avoiding large and complex banking structures as well as strengthening banks’ transparency and disclosures.


Various opinion makers have expressed views about the desirability of permitting new banks (including local area banks), allowing conversion of NBFCs into banks and whether large industrial and business houses should be allowed to set up banks. A number of issues, however, bear consideration. These include :

Þ Minimum capital requirements for new banks and promoters contribution

Þ Minimum and maximum caps on promoter shareholding and other shareholders

Þ Foreign shareholding in the new banks

Þ Eligible Promoters

(A) Whether industrial and business houses could be allowed to promote banks

(B) Should Non-Banking Financial Companies be allowed conversion into banks or to promote a bank

Þ Business Model

This paper reviews the international and Indian experience on all these aspects together with possible approaches with discussion on the pros and cons of each of the approaches. Annexures I, II and III indicating the country-wise experience in respect of licensing of banks, as indicated by the international banking regulators, are also annexed to the discussion paper. Based on the feedback, comments, suggestions received on the possible approaches discussed in this paper and detailed discussions with the stakeholders, the RBI will frame detailed guidelines for licensing of new banks and invite applications for setting up new banks. All applications received would then be examined by an external group, who would then make recommendations to the RBI with regard to granting licences to the applicants. However, the intention is to grant a limited number of licences.

6. Minimum capital requirements for new banks and promoters contribution

6.1 International Experience

6.1.1 Internationally, the bank regulators either insist on certain initial minimum capital to be brought by the applicant/applicants (e.g., European Union, Germany, France, United Kingdom, Japan, Canada, Hong Kong, Malaysia, Singapore) to obtain a banking license, or assess the required start-up capital to be brought by the proposed bank based on the scale, nature, complexity and inherent risks of the operations as proposed in the business plan (e.g., Australia, USA).

6.1.2 Minimum capital requirements range between USD 1.6 million (INR 8 crore) in Argentina to USD 1077.8 million (INR 5389 crore) in Singapore.

6.1.3 Out of the statistics available for 21 countries, four countries have minimum capital requirements exceeding USD 100 million (INR 470 crore) viz. Malaysia – USD 618.8 million (INR 3094 crore), Kuwait – USD 257.3 million (INR 1286 crore), Indonesia – USD 331 million (INR 1655 crore) and Singapore – USD 1077.8 million (INR 5389 crore).

6.1.4 However, in Australia and USA the capital requirements are prescribed on a case to case basis depending on the business plan, scale, nature and complexity of operations. Further, in Hong Kong and Argentina, minimum capital is determined in accordance with the type of financial institution being established.

6.2 Indian Approach

6.2.1 The guidelines issued in 1993 for licensing of new banks in the private sector had prescribed Rs. 100 crore as minimum capital and the 2001 guidelines raised this to Rs. 200 crore to be increased to Rs.300 crore over three years from commencement of business.

6.2.2 In India, as there are only full-fledged bank licenses with no restricted licenses being given, the minimum capital requirement has been kept reasonably high.

6.2.3 Taking into account the lapse of time since the last guidelines issued in January 2001 and inflation since then, there is a case to have the minimum capital requirement at more than Rs. 300 crore.

6.2.4 Possible Options/Solutions

(a) Having a low minimum capital requirement (but more than Rs.300 crore) for new banks


Ø This may attract those who are serious about participating in financial inclusion to set up banks.

Ø This may result in optimum utilization of capital from the beginning.


Ø It may result in many non-serious entities with inadequate financial backing seeking banking licenses.

Ø Small banks suffer from disadvantages in scale and scope and also face concentration risk making them more vulnerable.

Ø A low capital requirement could lead banks to run out of capital early, leading to increased risk taking for showing higher profit to attract more capital.

Ø Even serious parties with limited financial backing entering the banking space may not be able to participate meaningfully in financial inclusion as investment in technology would be a major requirement.

Ø Ensuring fit and proper shareholding and directors of large number of small banks is quite onerous.

Ø Large number of small banks lead to weakening of supervision in the sector by putting pressure on supervisory resources.

(b) Having a high (say Rs.1000 crore) minimum capital requirement for new banks


Ø In India, since licenses are given to only full-fledged bank, adequate minimum capital requirement may be necessary to ensure that the banks operate on a strong capital base.

Ø Higher minimum capital requirement would evince interest from serious parties with sufficient financial backing.

Ø Such banks would be able to play a more meaningful role in financial inclusion, as they are able to invest resources in technology and partnerships for financial inclusion.


Ø Promoters may not be seriously committed to financial inclusion as they are likely to be focused on more profitable large ticket size commercial banking.

(c) Initial minimum capital may be prescribed at say Rs.500 crore with a condition to raise the amount to say Rs.1000 crore within a period of say 5 years.


It will enable applicants from a wider spectrum, i.e. those willing to focus on financial inclusion as well as those interested in more sophisticated commercial banking, to seek a banking licence.

Ø It would be easier to dilute the promoters' stake to a lower percentage of the total capital of the new bank as the bank grows.


This could invite the not very serious applicants to set up a new bank.

Ø Some of the newly licenced banks may not be able to fulfill this condition of scaling up the capital and level of operations.

7. Minimum and maximum caps on promoter shareholding and other shareholders

7.1 International Experience

7.1.1 Internationally, most banking jurisdictions require banks to be widely held. There are no separate limits or caps for the promoters, but the same rule applies to other shareholders. Hence the promoters are required to seek approval from appropriate authorities if they desire to hold, directly or indirectly, or cross the general threshold limits ranging from 5 percent in Japan to 50 percent in European Union.

7.1.2 The general threshold limits in various countries that require approval from the competent authorities are - Germany (20%, 30%, 50%), Australia (15%), Canada (10%, 20%, 30%), European Union (20%, 30%, 50%), France (10%), Japan (5%).

7.1.3 In Hong Kong, for instance, there is no restriction on the maximum percentage of shares that an individual can hold in an Authorised Institution (AI). However, a person who intends to hold 50 percent or more of the share capital of an AI should be a well established bank or other supervised financial institution in good standing in the financial community and with appropriate experience.

7.1.4 In Canada, the approval thresholds are 10 percent, 20 percent and 30 percent where Ministerial approvals are required for acquiring such shareholding. Further, there is differential treatment with respect to maximum permitted shareholding in banks depending on whether the banks are small, medium or large sized banks. In case of small bank (with equity less than $ 2 billion) shareholding could be permitted beyond 10 percent and up to 100 percent with the permission of the Minister.  In case of medium sized bank (with equity more than $ 2 billion but less than $ 8 billion), shareholding could be permitted beyond 10 percent and up to 65 percent with the permission of the Minister, subject to the condition that at least 35 percent of voting shares should be listed in the stock exchanges. Further, in case of large banks (with equity of $ 8 billion or more), shareholding could be permitted beyond 10 percent of any class of shares and up to 20 percent of any class of voting shares or up to 30 percent of any class of non-voting shares with the approval of the Minister, provided the person does not control the bank and is not a major shareholder (holding more than 20 percent of shares). The exceptions to the bar on being major shareholders in such large banks are bank holding companies and certain eligible institutions (e.g. widely held insurance holding companies, widely held Canadian financial institutions, eligible foreign institutions). However, widely held bank holding companies are permitted to own 100 percent of the shares of the subsidiary banks in Canada. Thus, Canada has tighter norms for ownership and control with respect to large banks and has relaxed norms for the small and medium sized banks.

7.1.5 In USA, there are no conditions relating to dilution of stake of promoters / shareholders because of other conditions relating to control.

7.2 Indian approach

7.2.1 Modern banking in India started with the establishment of a limited number of banks by British agency houses, which were largely confined to port centres, for financing of trade in the raw materials needed for British industries. The Indian enterprises made significant entry into banking business only during the early twenties, which got strengthened by the growing nationalist sentiment and the spread of the Swadeshi movement. The economic power in the Indian joint stock banks was concentrated in the hands of a few families, who managed to make the bulk of its finance available to themselves, favoured groups and their concerns. Moreover, the bulk of the bank advances were diverted to industry, particularly to large and medium-scale industries and big and established business houses, while the needs of vital sectors like small-scale industry, agriculture and exports tended to be neglected. It was only due to the impact of the diversification and growth of Indian industry during the Second World War as also the Five Year Plans on industrial development in the fifties that Indian banks changed their banking policies and stance to a certain extent.

7.2.2 The banking system, being an important intermediary through which the savings of the community got channelized and served as a key constituent of country's basic social and economic objective, the Government of India introduced a scheme of ‘social control’ over banks in 1967 with the main objective of achieving a wider spread of bank credit, preventing its misuse, directing a larger volume of credit flow to priority sectors and making it a more effective instrument of economic development.

7.2.3 Subsequently, in July 1969, 14 major commercial banks were nationalized, the basic objective of which was to ensure that credit was channeled to various priority sectors of the economy, which were hitherto neglected, and in accordance with the national planning priorities. The nationalization of commercial banks marked a paradigm shift in the focus of banking as it sought a shift from class banking to mass banking and a thrust to branch expansion in the rural and semi-urban areas as also stepping up of lending to the so called priority sectors. Additional statutory powers were conferred upon the Reserve Bank, not only with the objective of protecting the depositors’ interest, but also to ensure that particular clients or groups of clients are not favoured in the matter of distribution of credit and whatever the character of the shareholding, its influence is neutralized in the constitution of the board of directors and in the actual credit decision taken at different levels of bank management.

7.2.4 To avoid problems arising out of possible conflict of interests, such as connected lending, the 1993 and 2001 guidelines on entry of new private sector banks sought to reduce the control of functions of banks by the promoters.

7.2.5 In India, the promoters have been allowed to bring in higher stake (minimum of 40 percent of the paid-up capital of the bank) at the time of licensing of banks with a lock-in period of 5 years. The main intention was to have a stable capital base, and strong professional management, but without any interference or control of management by the promoters.

7.2.6 The February 2005 Ownership and Governance (O & G) guidelines require promoters and other shareholders of the banks to divest/dilute their shareholding to a level of 10 percent or below of the bank’s share capital within a specified time frame. However, under exceptional circumstances and where the ownership is that of a financial entity, that is well established, well regulated, widely held, publicly listed and enjoying good standing in the financial community, higher shareholding is permitted to a level of more than 10 percent up to 30 percent. A level exceeding 30 percent is subject to higher due diligence standards prescribed in the February 2004 guidelines for acknowledgement of transfer / allotment of shares in private sector banks.

7.2.7 Any acquisition or transfer of shares of private sector banks, taking the aggregate shareholding of an individual or group, either directly or indirectly to 5 percent or more of share capital, requires acknowledgement from the Reserve Bank of India which is aimed at ensuring that the significant shareholders are fit and proper.

7.2.8 Banks (including foreign banks having branch presence in India) and financial Institutions are not permitted to acquire any fresh stake in a bank’s equity shares, rendering its holding to exceed 5 percent of the investee bank’s equity capital. This is with a view to limit interlocking of capital within the banking system.

7.2.9 Possible Options/Solutions

(a) Retaining the current approach of requiring promoters to bring in a minimum of 40 percent of capital with lock-in clause for 5 years and the threshold for other significant shareholders to be restricted to maximum of 10 percent with the requirement to seek acknowledgement from Reserve Bank of India on reaching 5 percent threshold and above. Promoters too would have to dilute to the extent required in a time bound manner say, 5 years after the lock in period.


Ø Large shareholding by promoters in the initial stage would ensure that the bank has promoters’ stake in the development of the bank in the initial stages while the dilution requirement would lead to diversified holding without significant control on the functions of bank.

Ø Requiring dilution of shareholding upfront at the time of licensing would ensure that only promoters having no interest in exercising control over the banks would seek bank license.

Ø The bank would be run professionally in the long run in the absence of any significant influence.


Ø Serious promoters may find the dilution requirement to a very low level unattractive and could deter them from setting up a bank.

Ø In the absence of any serious promoter, the bank may lack the vision and direction a new bank may require.

Ø In the absence of a serious promoter, there would be difficulty in fixing accountability and responsibility for the affairs of the bank.

(b) Retain the general threshold for the shareholders at 5 percent of the capital but raise the threshold for promoters and other significant shareholders to say 20 percent in the long run. Higher shareholding could be considered exceptionally subject to increasingly stringent criteria.


Ø This could invite serious promoters as well as serve the purpose of diversified shareholding .

Ø Due to the long term interest, the promoters would be interested in formulating long term vision and goals, provide direction, take keen interest in improving business and profitability in order to protect their reputation.

Ø The promoters would be interested in infusing capital into the bank in times of distress to protect their reputation.

Ø For the regulator, fixing responsibility and accountability becomes easier.


Ø Any change would also have to be implemented for other existing banks.

Ø The promoters and other shareholders may not consider the level of shareholding significant enough for committing resources and energies. Alternatively, this level may not be low enough to ensure there is no significant influence. As such there may be neither a totally professional organization nor one that has a strategic driving force.

(c) Allow promoters to hold their initial shareholding of 40 percent


Ø This would ensure continuing stake of promoters in the bank with all the attendant benefits of providing direction, commitment and resources.


Ø This would lead to concentrated shareholding in banks, which in the Indian context is found to be detrimental to depositors’ interests in the long run.

Ø The promoters would gain control on the functioning of banks, which may lead to diversion of depositors' funds, lending within the group on non-commercial terms, connected lending, etc.

(d) Follow the Canadian Model (para 7.1.4) of shareholding pattern

Schematically a model for India could be : no restriction on ownership up to 5 / 10 percent with permission to hold up to 40 percent of capital in banks with shareholders' equity up to say Rs. 1000 crore, 30 percent of capital in banks with shareholders' equity more than say Rs. 1000 crore and up to say Rs. 2000 crore, and permitted maximum holding (10 percent or 20 percent) in banks with shareholders' equity of more than say Rs. 2000 crore.


Ø The promoters’ support and direction would be available to the bank in the formative years, with the advantage of ensuring long term vision, goals and direction for the bank.

Ø Once the bank grows to a substantial size and has the potential of creating an impact in the financial system, this model ensures that the bank is run professionally and that there is no controlling shareholder influencing the functions of the bank.

After achieving sufficient experience and growth in size, the bank would be performing professionally and on its own strength.

Ø The bank will have the option to decide its business model and size consistent with promoters’ interest in the extent of shareholding.


Ø This would lead to concentrated shareholding for smaller banks with the attendant disadvantages.

Ø This could induce the promoters to expand their business very slowly so as to have control for a longer period and thus underperform from the economy’s perspective.

Ø Once the promoters help establish the bank in the financial sector and achieve substantial growth, there may be some resistance to giving up their control and shareholding, leading to possible non transparent shareholding.

8.  Foreign shareholding in the new banks

8.1 Indian Approach

8.1.1 The 2001 guidelines on entry of new banks permitted NRIs to participate in the primary equity of a new bank to the maximum extent of 40 percent. However, the equity participation was restricted to 20 percent within the above ceiling of 40 percent, in the case of a foreign banking company or finance company (including multilateral institutions) acting as a technical collaborator or a co-promoter.

8.1.2 Subsequently, based on the March 5, 2004 Press Note 2 of the Government of India’s (Ministry of Commerce and Industry), the aggregate foreign investment from all sources (FDI, FII, NRI) in private sector banks was not to exceed 74 percent of the paid-up capital of the bank, under the automatic route. This included FDI, investment under Portfolio Investment Scheme (PIS) by FIIs and NRIs, and also included IPOs, Private Placements, GDRs/ADRs and acquisition of shares from existing shareholders.

8.1.3 Further, the FDI policy prescribes that at all times, at least 26 percent of the paid up capital of private sector bank will have to be held by residents, except for wholly-owned subsidiary of a foreign bank.

8.1.4 The sub caps for individual FII and NRI holding is restricted to 10 percent with the aggregate limit for all FIIs and NRIs capped at 24 percent and 10 percent respectively, with a possibility to raise cap with the approval of the Board/General Body to 49 percent and 24 percent respectively.

8.1.5 Transfer of shares under FDI from residents to non-residents requires approval of Foreign Investment Promotion Board (FIPB) under Foreign Exchange Management Act (FEMA).

8.1.6 The February 3, 2004 RBI guidelines on grant of acknowledgement of transfer/allotment of shares in private sector banks is also applicable to acquisition of shares by foreign investors, if such acquisition results in any person owning or controlling 5 percent or more of the paid up capital of the private bank.

8.1.7 However, the Press Notes 2, 3 & 4 issued by Government of India in February 2009 indicate that banks with foreign shareholding of more than 50 percent would be treated as nonresident owned banks. In the event of the foreign shareholders having the right to appoint majority of directors on the Board, the bank would be treated as nonresident controlled bank.

Since the objective is to create strong domestic banking entities and a diversified banking sector which includes public sector banks, domestically owned private banks and foreign owned banks, aggregate non-resident investment including FDI, NRI and FII in these banks could be capped at a suitable level below 50 percent and locked at that level for the initial 10 years.


Ø This would enable foreign capital to be used in the promotion of domestic banks.

Ø This would allow for foreign technical collaboration in setting up domestic banks.

Ø The downstream investment of banks for monitoring indirect foreign investment would not be an issue.


Ø Foreign capital willing to invest in banking or promote banks in India will be constrained.

Ø Raising of additional capital predominantly from domestic sources may pose a problem;

Ø This would be in contrast to the present FDI policy which allows 74 percent foreign equity in private sector banking.

Ø Banks may not be able to use the innovative approaches brought in by foreign promoters.

9. Eligible Promoters

9.1 (A) Whether industrial and business houses could be allowed to promote banks

9.1.1 International Experience Although commercial business ownership of banks by non-financial firms is not legally prohibited in most of the countries, the concerned home countries’ laws and regulations typically limit the percentage of voting rights and controlling positions that any shareholder could obtain with prior approval of the regulatory authorities. This regulates the influencing power of the commercial shareholders in bank decision banking.  Further, most developed country's banking regulators/jurisdictions such as, Australia, Canada, European Union, Germany, France and United Kingdom do not specifically restrict industrial companies from setting up banks, but limit the percentage of voting rights and controlling positions that any shareholder can obtain, with the prior approval of the regulatory authorities. In Canada, small banks can be owned by single owners and commercial enterprises. United Kingdom has allowed industrial groups to participate in banking. Tesco Bank is a prime example. In South Africa, there are no regulations or broader concerns about industrial houses or families owning banks, and the regulator is more focused on the quality and reputation of the shareholders. Taiwan and Hong Kong do not have any restrictions on ownership of banks by industrial houses/families. However, there are standard restrictions on related party transactions [such as limits on percentage of total loans that can be made to private sector (including industrial houses) companies and intra-group lending be made on an arms-length basis].
In Japan, the banking regulator has strict and conservative standards for granting banking license. While there are no specific restrictions on granting of banking licenses to conglomerates/industrial houses, the regulator places certain restrictions on governance and disclosure based on shareholding levels, i.e. a shareholder has to report to the banking regulator on crossing 5 percent ownership, and any increase in ownership above 5 percent requires specific permission from the banking regulator. This automatically limits control by industrial houses as far as new banks are concerned.
However, the Keiretsu Model adopted in Japan earlier is somewhat different, in the sense that loose-knit groups of firms (called keiretsu), organized around a lead bank, are allowed to hold shares in each other. For most of the large keiretsu, such as Mitsubishi and Sumitomo, internal group holdings can account for as much as 25 percent of the total group equity. It may, therefore, be possible that a bank can informally control a much larger stake than 5 percent through the crossholding structure.
In USA, industrial houses are not allowed to own banks. The regulatory framework is designed to protect a bank from the risks posed by the activities or conditions of its parent company and the parent's non-bank subsidiaries and maintain the general separation of banking and commerce. This has been done by way of GLB Act, 1999 by authorizing financial holding companies to affiliate only with companies that were engaged in activities determined to be financial in nature or incidental to financial activities. Further, the Act requires the corporate owners of full service banks to be supervised on a consolidated basis. However, certain exceptions were allowed to industrial loan companies chartered in certain States in 1987. Several large international companies such as General Motors, General Electric, BMW, Volkswagen and Volvo own industrial loan companies under the exception and use these companies to support various aspects of their global operations. In Brazil, industrial houses are permitted to set up banks. However, ownership limits beyond certain percentage require regulatory approval so as to manage the moral hazard of intra-group lending and also prevent regulatory capture.
In Korea, subsequent to Asian crisis, the industrial houses (chaebol) are barred from promoting new banks as they believe in keeping banking and commerce separate from each other. Twelve percent of countries including the USA restrict the mixing of banking and commerce (Page – 107, Rethinking Banking Regulation : Till Angels Govern by James R. Barth, Gerard Caprio Jr. and Ross Levine)

9.1.2 Indian Approach Prior to nationalization of major commercial banks in 1969, the industrial and business houses, having control of the banks, diverted bulk of the bank advances to industry, particularly to large and medium-scale industries and big and established business houses, while the needs of vital sectors like small-scale industry, agriculture and exports were neglected. The main objective of nationalization of commercial banks was to make a shift in the focus of banking from class banking to mass banking and provide a thrust to branch expansion in the rural and semi-urban areas as also stepping up of lending to the so called priority sectors. The 2001 licensing guidelines prohibited promotion of new banks by industrial houses. However, individual companies, directly or indirectly connected with large industrial houses were permitted to acquire by way of strategic investment shares not exceeding 10 percent of the paid-up capital of the bank, subject to RBI's prior approval.

9.1.3 View Points

I. In Support

i. Industrial and business houses can be an important source of capital and can provide management expertise and strategic direction to banks as they have done to a broad range of non-banking companies and other financial companies.

ii. Large industrial and business houses have already been permitted to operate in other financial services sectors, such as insurance companies, asset management companies and other non-banking finance companies including loan and leasing companies. Many of the largest private sector companies in these segments are fully or partially owned by industrial and business houses. Thus, the industrial and business houses with their presence in the above sectors, are already competing with banks both on the assets and liabilities side.

iii. Industrial and business houses have a long history of building and nurturing new businesses in highly regulated sectors such as Telecom, Power, Automobiles, Defence, infrastructure projects like Airports, Highways, Dams, Ports.

iv. Equity of large industrial and business houses is widely held and all are listed on the stock exchanges and are accordingly subject to Companies laws, SEBI laws and regulations on transparency, disclosure and corporate governance.

v. An Industrial and business house with presence across various sectors would face a higher reputational risk compared to a pure individual promoter or financial services player.

vi. Strengthening banking regulation & supervision, stronger corporate governance norms, a more competitive banking market and stringent prudential regulations and disclosure requirements could mitigate the risks of affiliations of banks with the industrial and business houses.

vii. Permitting industrial and business houses to own a limited number of banks should not lead to undue concentration of control of banking activities as the Indian banking system is largely composed of public sector and private sector banks.

II. Potential risks

Even though Industrial and business houses are already permitted in other areas of financial services, banks are special as they are highly leveraged fiduciary entities central to the monetary and payment system. There are several deep rooted fears in allowing industrial and business houses to own banks. Mainly these relate to the fact that such an affiliation tends to undermine the independence and neutrality of banks as arbiters of the allocation of credit to the real sectors of economy. Conflicts of interest, concentration of economic power, likely political affiliations, potential for regulatory capture, governance and safety net issues are the main concerns. The Japanese experience with Keiretsu, the Korean experience with Chaebols and the Indian experience prior to nationalization are strong reminders of the pitfalls of commercial interests promoting / controlling banks.

9.1.4 Possible Options/Solutions

(a) Industrial and business houses may be permitted to promote banks


Ø Apart from industrial and business houses, there may not be many entities / parties that could bring in the capital required for banks, particularly if the threshold levels are kept high. In view of the large developmental needs of the economy, there is need for large capital investment in the banking sector.

Ø The entrepreneurial and managerial talent amply demonstrated by industrial and business houses in Telecom, Power, Automobiles, Defence, important infrastructure projects, Life Insurance, General Insurance, Asset Management Companies and NBFCs which could be gainfully harnessed in the banking sector with suitable safeguards would be lost.

Ø Further, as per the International Monetary Fund (IMF) paper on selected Issues on the Republic of Korea, while earnings of industrial companies/commercial groups are not necessarily negatively correlated with bank earnings, the financial groups' earnings may be positively correlated with bank earnings over a wide range of financial shocks. Thus, the industrial companies could act as a source of contingent capital for banks.


Ø Banking being highly leveraged business and dealing with public money, it makes sense to keep Industry / business and banking separate.

Ø When banks are flush with liquidity, there is a great risk of diverting the funds to liquidity constrained operations of the group. Further, as industrial and business groups are involved in various types of activities they may be able to rotate funds from one entity to another, which makes it difficult for the supervisors / regulators to trace source and utilisation of funds, especially when all the entities in the group are not regulated by one regulator.

Ø Preventing industrial and business houses to promote banks would automatically eliminate any conflicts of interest situations as well as situations similar to the pre 1969, when banking was monopolised in the hands of few individuals and where bank’s funds were used for connected lending.

Ø Allowing industrial and business houses to promote banks creates conflicts of interest through self dealing at the expense of bank clients. Conflicts of interest could also arise from transactions between the bank and its affiliates. A bank affiliated to a commercial firm may deny loans to its affiliate’s competitors, and instead favour its commercial affiliates in granting loans on preferential terms. Further, there may be risk of connected lending to companies within the group or to customers or suppliers of such companies on preferential terms. This would transfer the resulting risks to the minority shareholders, relatively uninformed depositors and the Deposit Insurance Fund. Commercial affiliates are likely to provide a captive market for an affiliated bank, thus foreclosing a substantial amount of competition in banking markets.

Ø As large industrial and business conglomerates have cross holding among their group entities engaged in diverse activities in India and abroad, dealing with complex structures of the industrial / business houses poses difficulties in supervision and regulation.

Ø Major operations of the industrial and business group may not be well regulated which makes it difficult to assess the ‘fit and proper’ status of the industrial / business group.

Ø In the absence of statutory provisions that impose strong penalties for violations, dealing very strongly with conflict of interest situations and connected lending as available in Hong Kong where the violations of provisions would lead to penalty and imprisonment, allowing industrial / business houses to set up banks and allowing them access to bank’s funds may be risky.

Ø Linking banking with commercial activities may tend to undermine the neutrality and independence of banks in deciding allocation of credit to the real sectors of the economy. Such distortion in allocation of credit may have substantial adverse effect on the overall productivity of the economy.

Ø The complex web of relationships of commercial firms with their customers or suppliers and proper monitoring of preferential access to credit would be very difficult. Further, the Industrial and business houses could engage in cross-shareholding in equity of group companies, which would make it difficult to assess the true capital structure of the bank. Supervision of banking conglomerate groups having non-financial entities within them could also be a challenge for the supervisors. The above issues could also lead to overburdening of the supervisory resources of the Reserve Bank.

Ø The industrial and business houses may not be committed to attaining broader objectives of financial development particularly ensuring financial inclusion and providing services to all sections of society.

Ø If the Industrial houses / business groups come under stress especially in a prolonged downturn, it may undermine confidence in the banks promoted by industrial and business houses which could be a threat to financial stability.

(b) Industrial and business houses that have predominant presence and experience in the financial sector could be allowed to set up banks subject to other due diligence process


Ø Track record of the industrial and business houses in the financial sector is available from other regulators and authorities to ensure that only those with sufficiently long and sound track record promote banks.

Ø Professional skills and expertise in the group’s financial companies would add value to the bank.


Ø Possible concentration of economic power in all major areas of business and finance could be a potential threat to financial stability

9.1.5 Possible safeguards to address the downside risks of Industrial and business houses promoting banks

i. Strengthening the governance guidelines of 'fit and proper' criteria on a continuing basis.

ii. Fit and proper criteria and background of promoter directors and top executives should be rigorously examined. No objection certificate of the promoters credentials, integrity and background should be taken not only from banks and other regulatory agencies but also from investigating agencies like Central Bureau of Investigation, Enforcement Directorate, Income Tax authorities, etc.

iii. Further, other parameters such as corporate governance standards in the corporate entity, extent of financial activities carried out by the industrial / business house, comfort with the corporate structure within the group, whether ownership is diversified and separate from management and the source of promoters’ equity, should also be specially verified.

iv. The structure proposed for promoting banks should be such that the bank can be ring fenced from other financial and commercial entities in the group. RBI should be satisfied about its ability to supervise the bank and obtain all required information from the Group relevant for this purpose smoothly and promptly.

v. Industrial and business houses promoting banks must have diversified ownership. However, Industrial and business houses engaged in real estate activities either directly or indirectly, should not be allowed to promote banks; given the sensitivity of the real estate sector, any sub-version of the Chinese walls between the bank and the rest of the Group could have extremely negative consequences for financial stability.

vi. There could be stringent limits on transactions between the bank and other entities in the Group to minimize the prospect of direct or indirect lending to other entities in the Group. Internationally, there are various means through which the connected lending is checked – e.g., - Brazil and Japan do not permit intra-group lending, Taiwan doesn’t allow unsecured lending and allows secured lending only if approved by the Board and Australia requires all intra-group lending to be cleared by the Board. Other countries, like USA and Hong Kong, however, do not have specific restrictions for industrial / business groups. It may be better to be ultra cautious and ban any intra group exposure.

vii. The Board could be mandated to have a majority of independent Directors and the Chairman should be a part time Chairman

viii. To guard against the possibility of Independent Directors not being truly independent, with consequences for corporate governance, legislative changes should be made to empower RBI to supersede the Board where it is felt that the functioning of the Board / bank is not in the interest of depositors or financial stability, as a pre condition for considering allowing Industrial or business houses to promote banks.

ix. To contain the possibility of “holding out” if an industrial / business house comes under severe stress, industrial and business houses may not be allowed to use the brand name and logo of the Group.

x. To ensure transparency of the processes and to assess the ability of the promoters to meet the 'fit and proper' criteria, all applications for setting up new banks by business houses could be put in public domain for comments from the general public.

Some of the issues raised above would require amendments to various Acts/statutes and it would not be possible to address these issues until and unless the amendments are in place.

(c) As an intermediate step, industrial and business houses could be allowed to take over RRB’s, before considering allowing them to set up banks.


Apart from all the pros discussed in the context of allowing industrial and business houses to promote banks, the following additional advantages will accrue :

Ø This will give industrial and business houses an opportunity to prove their suitability for promoting banks.

Ø If on balance there is a net downside in allowing Industrial or business Houses to promote banks, the negative externalities would be limited.

Ø This has the potential to provide an immediate impetus to financial inclusion and revitalize RRBs especially those in underbanked regions.

Ø The decision or otherwise to allow Industrial and business houses to promote banks would be a much more measured and balanced one due to the experience gained.


Ø Apart from all the cons discussed in the context of allowing industrial and business houses to promote banks, this option would also require legislative changes which would need to be expedited.

In this eventuality, all the possible safeguards discussed in para 9.1.5 would also be applicable.

9.2. (B) Should Non-Banking Financial Companies be allowed conversion into banks or to promote a bank

9.2.1 International Experience In some countries, the financial institutions that are already well regulated are favoured for conversion into banks. In Hong Kong, the entry level criterion for an applicant is that it should already have been a Deposit Taking Company (DTC) or Restricted Licence Bank (RLB) for not less than three continuous years. In USA, certain types of depository institutions (state commercial banks, state savings associations, state savings banks, state trust companies, federal savings banks and federal savings associations) are allowed to convert into national banks, provided they demonstrate the ability to operate safely and soundly and are in compliance with applicable laws, regulations and policies, and are consistent with the National Bank Act and applicable OCC regulations and policies. In determining action on a conversion application in USA, the OCC normally considers the applicant’s condition and management. This includes compliance with regulatory capital requirements and conforms to the statutory criteria, including many of the same standards applicable to chartering a de novo national bank; adequacy of policies, practices, and procedures; CRA record of performance, etc. The OCC may impose special conditions for approvals to protect the safety and soundness of the bank; prevent conflicts of interest; provide customer protections; ensure that approval is consistent with the statutes and regulations; or provide for other supervisory or policy considerations.
A converting institution is also allowed to retain existing branches as a national bank, if such retention is consistent with applicable law.

.2 Indian Approach The Non Banking Financial Sector in India comprises various types of financial institutions including All-India financial institutions, development finance institutions, non banking finance companies (NBFC), etc. While the All-India financial institutions (AIFIs) and development finance institutions (DFIs), are largely an offshoot of development planning in India, the NBFCs are mostly private sector institutions, which have carved their niche in the Indian financial system. Unlike the banking sector, the NBFC sector is heterogeneous in nature functionally as well as in terms of size, nature of activities and sophistication of operations. NBFCs include not only entities that are part of large multinational groups or Indian business groups, but also small players at district towns, with net owned fund (NOF) hovering at the statutory minimum of Rs 200 lakh.
Initially, with a view to protect the interests of depositors, regulatory attention was mainly focused on NBFCs accepting public deposits (NBFCs-D). Over the years, however, this regulatory framework has been widened to include issues of systemic significance. The sector is being consolidated and while deposit taking NBFCs have decreased both in size as well as in terms of the quantum of deposits held by them, NBFCs-ND have increased in terms of number and asset size. NBFCs-ND-SI (NBFCs- ND with asset size of Rs.100 crore and above) are subject to CRAR and exposure norms prescribed by the Reserve Bank. As at the end of financial year of 2008-2009, the total assets of NBFCs were at Rs. 95,727 crore and Public deposits were at Rs. 21,548 crore. The 2001 guidelines on entry of new banks in the private sector permitted NBFCs with a good track record for conversion into a bank, provided it satisfied the specific criteria relating to minimum net worth, not promoted by a large industrial house, AAA (or its equivalent) credit rating in the previous year, capital adequacy of not less than 12 percent and net NPA ratio of not more than 5 percent. So far, only one NBFC has been converted into a bank, and the transition has been fairly smooth.

9.2.3 Possible Options

a) Permitting conversion of NBFCs into banks


Ø Since NBFCs are already regulated by RBI and have a track record, the 'fit and proper' concerns could be addressed more easily.

Ø NBFC model particularly those in lending activities has been successful in expanding the reach of financial system and thus by converting to banks, this model could be scaled up to better leverage the benefits and achieve the objective of financial inclusion.

Ø Some of the sectoral credit issues, such as infrastructure and microfinance, could be better addressed if NBFCs specializing in the specified sectors can better leverage their competence by converting to banks and having access to low-cost funds.


Ø Though a prudential framework has been put in place for systemically important non-deposit taking NBFCs, these are minimal in their scope and cover limited areas. Further, such NBFCs are not, as yet, subject to regular onsite inspections.

Ø There has been a light-touch regulatory framework for non-deposit taking NBFCs. As such, the ability of the NBFC to run a bank under a heavier regulation cannot be extrapolated from this experience.

Ø The initial capital requirement for NBFCs is a miniscule Rs. 2 crore and the due diligence and ‘fit & proper’ assessment exercise of promoters/directors is minimal both in terms of scope and rigour, as compared to banks. The NBFC model and the bank model are entirely different as NBFC model provides financial access to excluded categories without the same regulation as applicable to banks. On the other hand, the banking license gives the institution full scope to carry out full-fledged banking activities, with stricter regulatory requirements. Therefore the NBFCs may not fulfill the ‘well established and well regulated’ criteria and hence the ‘track record’ of an NBFC cannot be taken as an automatic eligibility criterion for conversion into banks.

Ø Conversion of NBFCs into bank would require folding up of large number of branches and withdrawal from many segments of businesses as well as disinvestment from subsidiaries/affiliates not engaged in businesses permitted to banks.

Ø Conversion could also lead to demand for regulatory forbearance in the initial stage.

Ø NBFCs have niche space in the financial system and there is a need to strengthen them. Migration of stronger NBFCs will not strengthen the banking space while the NBFCs space will be weakened.

Ø The maturity mix of the asset portfolio is also skewed towards long term and the asset mix may not be compatible to the banking liabilities. If NBFCs are converted into banks they may take a long time to align themselves to banking.

Ø Moreover, the NBFC’s continued dependence on wholesale deposits and short term borrowings to sustain even their existing business operations would raise financial stability issues.

Note :In the case of conversion of NBFCs promoted by large industrial and business houses, the pros & cons of permitting industrial / Business houses to promote banks as well as the requirement that the industrial / Business house should not be engaged in real estate activity directly or indirectly will also apply.

(b) Permitting standalone (i.e. those not promoted by Industrial / Business Houses) NBFCs (including those regulated by SEBI, IRDA & NHB) to promote banks

In addition to the PROS and CONS under (a) above, the following are also relevant under this option.


Ø The expertise of the NBFC in the financial sector (as set out for the pros of permitting NBFCs to convert into banks) could flow into the bank if NBFCs are allowed to promote banks.

Ø The NBFCs could retain their niche space and yet contribute to the financial sector through the bank they would set up.

Ø NBFCs already being regulated would have a verifiable track record for ‘fit and proper’ assessment.

Ø The operations of the NBFCs may not be liquidity constrained and hence possibilities of diversion of funds may be less.

Ø Possibility of improved governance in banks due to ownership by entities experienced in the financial sector.


Ø Due to the maturity differences of the assets and liabilities of the NBFCs and banks, there may be possibilities of the bank funds being utilized to meet the NBFC liabilities and also of indulgence in regulatory arbitrage.

Ø NBFC Groups engaged in activities that are not permitted to banks would be a source of concern and contagion.

Ø Their experience in the financial sector would not be adequate enough to be a source of strength in promoting banks. (Please see cons in para 9.2.3 (a) in the context of permitting NBFCs to convert into banks).

Ø NBFCs may not have the financial strength or parentage to support bank’s capital needs particularly in periods of stress.

Note :NBFCs or its subsidiaries / Associates should not be engaged directly or indirectly in real estate activities for being considered eligible to promote banks.

10. Business Model

10.1 International Experience

10.1.1 Internationally, a 3-year business plan incorporating its goals, business structure, financial projections of balance sheets, cash flow and earnings, key financial and prudential ratios for the proposed bank and its subsidiaries on a consolidated basis.

10.1.2 The business plan is also required to address the adequate and appropriate risk management and internal control systems, compliance processes and systems, information and accounting systems, external and internal audit arrangements, and sensitivity analysis showing the results of changes in key assumptions under the worst case scenario.

10.1.3 In Hong Kong, the applicants are not expected to depart radically from their business plans in the first years of operation as an authorized institution, and if such a departure is proposed, the authorized institution is required to consult with the Monetary Authority in advance.

10.1.4 In USA, any change in business plan after the bank has started operations would require approval from the OCC. Further, each national bank has a responsibility under the Community Reinvestment Act (CRA) to help meet the credit needs of its entire community, consistent with the safe and sound operations of such institution. The CRA regulation requires each bank to delineate at least one assessment area, comprising of one or more metropolitan statistical area or areas or one or more contiguous political subdivisions (such as countries, cities or towns).

10.2 Indian Approach

10.2.1 The 2001 guidelines on entry of new banks stipulated that the applicants should furnish a project report covering business potential and viability of the proposed bank, the business focus, the product lines, proposed regional or locational spread, level of information technology capability and any other information that they consider relevant.

10.2.2 Applications are also supported by detailed information on the background of the promoters, their expertise, track record of business and financial worth, details of promoters' direct and indirect interests in various companies/industries, details of credit/other facilities availed by the promoters/promoter companies/other group companies with banks/financial institutions, and details of proposed participation by foreign banks/NRI/OCBs.

10.2.3 The guidelines also stipulated that the new bank will have to observe priority sector lending target of 40 percent of net bank credit as applicable to other domestic banks. A new bank was also required to open 25 percent of its branches in rural and semi-urban areas to avoid over concentration of their branches in metropolitan areas and cities. Other conditions such as use of modern infrastructural facilities in office equipments, computer, telecommunications, etc. were also specified in order to ensure provision cost-effective customer service.

10.3 Possible Options/Approaches

(a) Status- quo could be maintained where new banks could be licensed under the usual conditions.


Ø This would enable the new banks to compete in a level playing field.

Ø This could avoid having differential supervision and regulation for the new banks.

Ø Uniform norms could be applied to all banks, old and new, for their compliance.


Ø This approach would not further the objective of licensing new banks for achieving accelerated financial inclusion.

(b) Considering the thrust on financial inclusion, a business model oriented towards this objective could be preferred. The business model could be required to clearly articulate the strategy and the targets for achieving significant outreach to clientele in Tier 3 to 6 centers (i.e. in populations less than 50000) especially in the underbanked regions of the country either through branches or branchless models.  


Ø This would induce the new banks to participate in financial inclusion in a big way.

Ø This would also encourage banks to adopt latest and innovative methods and leverage information technology, BC / BF models in reaching the unreached.

Ø As the micro finance companies have already proved that the financial inclusion business model is viable, banks may not face problems relating to viability of the models.


Ø The business model heavily oriented towards financial inclusion may not be able to provide commensurate returns to banks to enable them to compete with other private sector banks in the country.

With heavy orientation towards financial inclusion involving high cost, cross subsidization of the financial inclusion activities with other gains is not possible.

Ø It will create uneven playing field vis-à-vis the existing banks with its attendant negative consequences for such banks.

Ø In case the bank deviates substantially from its proposed business model particularly if its earnings are low threatening its viability, there may not be any regulatory remedy. The thrust on financial inclusion will thus be lost in such cases.


This paper attempted to give a broad overview of the issues and concerns regarding entry of new banks. Given the pros and cons discussed above, the Reserve Bank would welcome broader discussion and debate on the following aspects :

Minimum capital requirements for new banks and promoters contribution

Minimum and maximum caps on promoter shareholding and other shareholders

Þ Foreign shareholding in the new banks

Þ Whether industrial and business houses could be allowed to promote banks

Þ Should Non-Banking Financial Companies be allowed conversion into banks or to promote a bank

Þ The business model for the new banks

August 11, 2010