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2014

Economy Updates – May-2014

Banking Sector in India

  • RBI was set up in 1935 by the RBI Act, 1934 as a private bank with two extra functions – regulation and control of banks in India and being the banker of the Government.
  • It was only in the year 1949 after nationalization, it emerged as the Central Banking body in India.

New Banking License Policy of Reserve Bank of India

  • Over the last two decades, the Reserve Bank of India has licensed 12 banks in the private sector.
  • In first phase, 10 banks were licensed on the basis of guidelines issued in January 1993.
  • The guidelines were revised in January 2001 based on the experience gained from the functioning of these banks 2 more licenses were issued.

Announcement by Finance Minister

  • The Union Finance Minister had made an announcement in his budget speech for 2010-11 that there was a need to extend the geographic coverage of banks and improve access to banking services and that RBI was considering giving some additional banking licenses to private sector players.

Few Guidelines for Licensing of New Banks in the Private Sector

  1. Promoters/Promoter Groups should be financially sound and have a successful track record of running their business for at least 10 years.
  2. Promoter/ Promoter Groups’ business model and business culture should not be misaligned with the banking model and their business should not potentially put 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.
  3. Promoter/ Promoter Group will be permitted to set up a bank only through a wholly-owned Non-Operative Financial Holding Company (NOFHC).
  4. The initial minimum paid-up voting equity capital for a bank shall be 5 billion.
  5. The bank shall get its shares listed on the stock exchanges within three years of the commencement of business by the bank.
  6. As per the present FDI policy, where foreign shareholding in private sector banks is allowed up to a ceiling of 74% of the paid-up voting equity capital. However, in the new private sector banks, it shall not exceed 49% of the paid-up voting equity capital for the first 5 years from the date of licensing of the bank.
  7. At least 50% of the Directors of NOFHC shall be totally independent directors.
  8. The bank shall open at least 25% of its branches in unbanked rural centers.

RBI’s decision to grant in-principle approval for banking license

  • On 02.04.2014, Reserve bank of India granted in-principle approval to two applicants out of twenty five applications considered.
  • IDFC limited and Bandhan Financial Services private Limited were permitted to set up banks under the Guidelines on Licensing of New Banks in the Private Sector.
  • Some of the notable business tycoons, namely Anil Ambani, Rahul Bajaj, Kumar Mangalam Birla lost the race for new banking licenses.
  • RBI has admitted that, their approach is conservative regarding issue of new bank licenses.
  • The in-principle approval granted will be valid for a period of 18 months during which the applicants have to comply with the requirements under the guidelines and fulfill the other conditions as may be stipulated by the RBI.
Financial Management