The Draft Guidelines for "Licensing of New Banks in the Private Sector.

Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated. After receiving feedback, comments and suggestions on the draft guidelines, and after certain vital amendments to Banking Regulation Act, 1949 are in place.

Key features of the draft guidelines are:

(i) Eligible promoters: Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10% or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible.

(ii) Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group.

(iii) Minimum capital requirement: Minimum capital requirement will be Rs 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40% of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be brought down to 20% within 10 years and to 15% within 12 years from the date of licensing of the bank.

(iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.

(v) Corporate governance: At least 50% of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.

(vi) Business model: Should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

(vii) Other conditions:

• The exposure of bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank.
• The bank shall get its shares listed on the stock exchanges within two years of licensing.
• The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)
• Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

(viii) In respect of promoter groups having 40% or more assets / income from non-financial business, certain additional requirements have been stipulated.