The Reserve Bank of India (RBI) has decided today to grant in-principle approval to

two applicants viz. I!"# $i%ited and Bandhan "inancial &ervices 'rivate $i%ited to set
(p )anks (nder the *(idelines on $icensing of +ew Banks in the 'rivate &ector iss(ed
on "e)r(ary ,, ,-./ (Guidelines). These two applicants were also reco%%ended as
s(ita)le for grant of in-principle approval )y the 0igh $evel 1dvisory #o%%ittee
(0$1#) set (p )y the RBI. The 0$1# had also reco%%ended that in the case of
!epart%ent of 'osts which has applied for licence it wo(ld )e desira)le for the RBI to
consider the application separately in cons(ltation with the *overn%ent of India. The
RBI has accepted the reco%%endation of the 0$1#.
The in-principle approval granted will )e valid for a period of .2 %onths d(ring which
the applicants have to co%ply with the re3(ire%ents (nder the *(idelines and f(lfil the
other conditions as %ay )e stip(lated )y the RBI. 4n )eing satisfied that the applicants
have co%plied with the re3(isite conditions laid down )y the RBI as part of in-principle
approval they wo(ld )e considered for grant of a licence for co%%ence%ent of )anking
)(siness (nder &ection ,,(.) of the Banking Reg(lation 1ct .565. 7ntil a reg(lar
licence is iss(ed the applicants wo(ld )e )arred fro% doing )anking )(siness.
Backgro(nd
In the )(dget speech of the 7nion "inance 8inister for the year ,-.--.. it was
anno(nced inter alia that there was a need to e9tend the geographic coverage of )anks
and i%prove access to )anking services and that RBI was considering giving so%e
additional )anking licences to private sector players. &()se3(ently RBI iss(ed
*(idelines for licensing of new )anks on "e)r(ary ,, ,-./.
1fter withdrawal )y two applicants ,: applications have )een considered. "ollowing the
*(idelines a 0$1# was set (p on 4cto)er /- ,-./ chaired )y for%er RBI *overnor
!r. Bi%al ;alan and co%prising three %e%)ers (viz. &hri #.B. Bhave for%er #hair%an
&<BI= &%t. 7sha Thorat for%er !ep(ty *overnor RBI= and &hri +achiket 8or !irector
RBI #entral Board) to screen the applications and to reco%%end licences only to those
applicants who co%ply with the *(idelines.
In the first stage the applications were scr(tinised )y RBI to ens(re eligi)ility of the
applicants (nder the *(idelines. Thereafter the applications were referred to the 0$1#.
The 0$1# s()%itted its reco%%endations to RBI on "e)r(ary ,: ,-.6 for its
consideration.
The RBI assessed the 3(antitative and 3(alitative aspects of the applicants as per the
criteria laid down in the *(idelines. This incl(ded analysis of the financial state%ents of
the key entities in the gro(p .- year track record of r(nning their )(sinesses proposed
)(siness %odel for the )ank as well as the applicants> de%onstrated capa)ilities for
r(nning a )ank plan for e9panding incl(sion and c(lt(re of co%pliance and integrity
de%onstrated )y the applicant in its past activities. Based on all this the RBI took a view
of the fit and proper stat(s of the applicant.
The decision to grant in-principle approval has )een taken after cons(lting the <lection
#o%%ission given that the #ode of #ond(ct for the co%ing elections is in force.
RBI>s approach in this ro(nd of )ank licences co(ld well )e categorised as conservative.
1t a ti%e when there is p()lic concern a)o(t governance and when it co%es to licences
for entities that are inti%ately tr(sted )y the Indian p()lic this %ay well )e the %ost
appropriate stance. *oing forward RBI intends to (se the learning fro% this licensing
e9ercise to revise the *(idelines appropriately and %ove to give licences %ore reg(larly
that is virt(ally on tap. It will also fra%e categories of differentiated )ank licences
)(ilding on its prior disc(ssion paper and this will allow a wider pool of entrants into
)anking. RBI )elieves that so%e of those entities who did not 3(alify in this ro(nd for a
f(ll-fledged )anking licence co(ld well apply in f(t(re ro(nds or co(ld apply for
differentiated licences (nder the proposed fra%ework.
The RBI in its first )i-%onthly 8onetary 'olicy &tate%ent for "?.: also said that after
this ro(nd of licensing it wo(ld grad(ate to a syste% of on-tap licences that will also
incl(de differentiated )ank licences. #(rrently all )anks in India have to follow the sa%e
(niversal %odel of )eing a )anker to every inco%e or interest gro(p which %akes setting
(p a )ank a costly affair.
1fter weeks of de)ate the <lection #o%%ission has given the go ahead. @The
co%%ission is of the view that the Reserve Bank of India %ay take necessary action as
dee%ed appropriate )y the Bank as per%issi)le (nder provisions of the RBI 1ct .5/6
Banking Reg(ration 1ct .565 and or any other relevant law(s)@ the <# said .
RBI will )e granting new licences after %ore than a decade since it handed o(t licences
to YES Bank in ,--/ and Kotak Mahindra to convert itself into a )ank fro% a non-)anking
finance co%pany. The central )ank has i%posed strict capital re3(ire%ents s(ch as Rs
:-- crore capital and p(t a lot of restrictions on how other gro(p activities co(ld )e
cond(cted. @Ae are on a path where the )anking space is set to get lot %ore
co%petitive.
#leary this %ay res(lt in press(re on %argins and pricing which wo(ld )enefit
c(sto%ers@ said &(nil Ba(shal regional #<4 for India and &o(th 1sia. This %ay also
)e the final one where )anking licences )eca%e s(ch a to(gh iss(e as the
*overnor Raghuram Rajan plans to iss(e licences on tap and also for differentiated
)anking.
@Ae sho(ld not )e giving licences every .- years@ RaCan told reporters on T(esday. @&o
I think that there is scope for having people with partial licences for pay%ents or only for
lending to co%e into the syste%.
This will allow people to develop )anking capa)ilities with relatively s%all size of
operations which will then allow the% to apply for f(ll )anking licences down the line@
he said RaCan also defended his decision to cons(lt the <# even tho(gh the finance
%inister ' #hida%)ara% had opined that RBI co(ld have gone ahead )y itself even
tho(gh the code of cond(ct was in place d(e to election anno(nce%ents.
@The idea to seek per%ission or C(st to %ake s(re the election co%%ission was on )oard
was pri%arily to shield the anno(nce%ent fro% controversy so that the new licensees
donDt get dragged into the political process which co(ld happen 3(ite easily@ said
RaCan. @It is perhaps a)(ndant ca(tion@ he added.
Guidelines for Licensing of New Banks in the Private Sector
Bey feat(res of the g(idelines areE
(i) <ligi)le 'ro%otersE <ntities F gro(ps in the private sector entities in p()lic sector and
+on-Banking "inancial #o%panies (+B"#s) shall )e eligi)le to set (p a )ank thro(gh a
wholly-owned +on-4perative "inancial 0olding #o%pany (+4"0#).
(ii) G"it and 'roper> criteriaE <ntities F gro(ps sho(ld have a past record of so(nd
credentials and integrity )e financially so(nd with a s(ccessf(l track record of .- years.
"or this p(rpose RBI %ay seek feed)ack fro% other reg(lators and enforce%ent and
investigative agencies.
(iii) #orporate str(ct(re of the +4"0#E The +4"0# shall )e wholly owned )y the
'ro%oter F 'ro%oter *ro(p. The +4"0# shall hold the )ank as well as all the other
financial services entities of the gro(p.
(iv) 8ini%(% voting e3(ity capital re3(ire%ents for )anks and shareholding )y
+4"0#E The initial %ini%(% paid-(p voting e3(ity capital for a )ank shall )e H: )illion.
The +4"0# shall initially hold a %ini%(% of 6- per cent of the paid-(p voting e3(ity
capital of the )ank which shall )e locked in for a period of five years and which shall )e
)ro(ght down to .: per cent within ., years. The )ank shall get its shares listed on the
stock e9changes within three years of the co%%ence%ent of )(siness )y the )ank.
(v) Reg(latory fra%eworkE The )ank will )e governed )y the provisions of the relevant
1cts relevant &tat(tes and the !irectives 'r(dential reg(lations and other
*(idelinesFInstr(ctions iss(ed )y RBI and other reg(lators. The +4"0# shall )e
registered as a non-)anking finance co%pany (+B"#) with the RBI and will )e governed
)y a separate set of directions iss(ed )y RBI.
(vi) "oreign shareholding in the )ankE The aggregate non-resident shareholding in the
new )ank shall not e9ceed 65I for the first : years after which it will )e as per the
e9tant policy.
(vii) #orporate governance of +4"0#E 1t least :-I of the !irectors of the +4"0#
sho(ld )e independent directors. The corporate str(ct(re sho(ld not i%pede effective
s(pervision of the )ank and the +4"0# on a consolidated )asis )y RBI.
(viii) 'r(dential nor%s for the +4"0#E The pr(dential nor%s will )e applied to +4"0#
)oth on stand-alone as well as on a consolidated )asis and the nor%s wo(ld )e on
si%ilar lines as that of the )ank.
(i9) <9pos(re nor%sE The +4"0# and the )ank shall not have any e9pos(re to the
'ro%oter *ro(p. The )ank shall not invest in the e3(ity F de)t capital instr(%ents of any
financial entities held )y the +4"0#.
(9) B(siness 'lan for the )ankE The )(siness plan sho(ld )e realistic and via)le and
sho(ld address how the )ank proposes to achieve financial incl(sion.
(9i) 4ther conditions for the )ank E
The Board of the )ank sho(ld have a %aCority of independent !irectors.
The )ank shall open at least ,: per cent of its )ranches in (n)anked r(ral
centres (pop(lation (pto 5555 as per the latest cens(s)
The )ank shall co%ply with the priority sector lending targets and s()-targets as
applica)le to the e9isting do%estic )anks.
Banks pro%oted )y gro(ps having 6- per cent or %ore assetsFinco%e fro% non-
financial )(siness will re3(ire RBI>s prior approval for raising paid-(p voting
e3(ity capital )eyond H.- )illion for every )lock of H: )illion.
1ny non-co%pliance of ter%s and conditions will attract penal %eas(res incl(ding
cancellation of licence of the )ank.
(9ii) 1dditional conditions for +B"#s pro%oting F converting into a )ank E <9isting
+B"#s if considered eligi)le %ay )e per%itted to pro%ote a new )ank or convert
the%selves into )anks.
'roced(re for applicationE
In ter%s of R(le .. of the Banking Reg(lation (#o%panies) R(les .565 applications
shall )e s()%itted in the prescri)ed for% ("or% III). The eligi)le pro%oters can send
their applications for setting (p of new )anks along with other details %entioned in
1nne9 II to the *(idelines to the #hief *eneral 8anger-in-#harge !epart%ent of
Banking 4perations and !evelop%ent Reserve Bank of India #entral 4ffice .,th
"loor #entral 4ffice B(ilding 8(%)ai J 6-- --. on or )efore ;(ly . ,-./.
'roced(re for RBI decisionsE
1t the first stage the applications will )e screened )y the Reserve Bank.
Thereafter the applications will )e referred to a 0igh $evel 1dvisory #o%%ittee
the constit(tion of which will )e anno(nced shortly.
The #o%%ittee will s()%it its reco%%endations to the Reserve Bank. The
decision to iss(e an in-principle approval for setting (p of a )ank will )e taken )y
the Reserve Bank.
The validity of the in-principle approval iss(ed )y the Reserve Bank will )e one
year.
In order to ens(re transparency the na%es of the applicants will )e placed on the
Reserve Bank we)site after the last date of receipt of applications.
Backgro(nd
It %ay )e recalled that after the anno(nce%ent %ade )y the 0on>)le "inance 8inister in
his B(dget &peech for the year ,-.--.. the Reserve Bank had p(t o(t a !isc(ssion
'aper on its we)site on 1(g(st .. ,-.- inviting feed)ack and co%%ents. Thereafter
the draft g(idelines on the licensing of new )anks were released on the Reserve Bank
we)site on 1(g(st ,5 ,-.. inviting views and co%%ents. #o%%ents and s(ggestions
received on the draft g(idelines were e9a%ined and so%e of the s(ggestions were
accepted. 1fter the vital a%end%ents to the Banking Reg(lation 1ct .565 were carried
o(t in !ece%)er ,-., and after cons(lting with the *overn%ent of India the g(idelines
for $icensing of +ew Banks in the 'rivate &ector have now )een finalised.
Financial Inclusion:-
The new )anking licences iss(ed to I!"# and Bandhan "inancial &ervices 'rivate
$i%ited and the Reserve Bank>s intention to consider the application of !epart%ent of
'osts separately in cons(ltation with the #entral *overn%ent are likely to widen the
scope for financial incl(sion.
It was a long process and the RBI has done a caref(l eval(ation (sing all filters
3(antitative and 3(alitative while selecting the entities for )anking licences said
&hashwat &har%a 'artner-"inancial &ervices B'8* in India. The RBI was convinced
that these entities wo(ld )e a)le to do C(stice to the central )ank>s declared slogan
Gfinancial incl(sion> he pointed o(t.
Ahile the RBI has )een conservative in granting in-principle approval to only two
applicants in this ro(nd what is very heartening to note is the stated o(tlook to review
the g(idelines and %ake this a reg(lar process %oving towards an Gon-tap> policy
incl(ding differentiated licences said 8r. &har%a.
The new )anks added in .55/-56 were only o)ligated to open )ranches in r(ral areas.
The )anks added s()se3(ently in ,--/--6 were re3(ired to have ,: per cent )ranches
in se%i-(r)an and r(ral locations. The c(rrent g(idelines re3(ire new )anks to set (p ,:
per cent )ranches in (n-)anked r(ral locations with pop(lation (p to 5555. If we
caref(lly look at the develop%ents in the two decades this clearly indicates the foc(s
RBI is having towards incl(sive growth and financial incl(sion said Rishi *(pta #44 K
<! "I+4 'ayTech the largest )(siness correspondent in India offering a )o(3(et of
financial services.
Bandhan is well-esta)lished in r(ral parts of <astern India. It essentially caters to the
entreprene(rial F )anka)le %asses )y e9tending the% credit via Coint lia)ility gro(p
(;$*) %odel. Ahereas other typical corporate )anks find it diffic(lt to %ake r(ral
)ranches profita)le Bandhan sho(ld )e a)le to leverage its r(ral presence effectively
said 8r. *(pta. Ahat needs to )e seen is how it is a)le to cater to the )anking needs of
the B'$ sections of r(ral India he added.
Emerging cometition
Ae )elieve new entrants will take ti%e to scale (p their )ranch and lia)ility networks
and will not pose significant threat to the strong depositFretail franchises created )y other
larger )anks said 0ati% Broachwala 1nalyst Barvy &tock Broking while talking on
newly e%erging co%petition in the sector.
The RBI has also reiterated that the new )ank licences will )e an on-tap process fro%
here on. and g(idelines for the sa%e will )e iss(ed soon. 8r. Broachwala said that the
process of grad(al entry of )anks over a period of ti%e wo(ld s%oothen o(t f(t(re
co%petition in the sector and also red(ce risks of fail(re of new )anks.
Ae have a strong starting position in corporate )anking. 1s a )ank we will )e a)le to
deliver to o(r e9isting clients wider array of prod(cts. That sho(ld red(ce o(r
dependency on ter% loans and allows (s to )roaden o(r reven(e )ase fro% corporate
)anking. In parallel it is o(r goal to )(ild a depository franchise which we intend also to
enter the space of retail )ankingL to reach the goal of an (niversal )ank said RaCiv B.
$all <9ec(tive #hair%an I!"#. Ae will also have a partic(lar foc(s on )(ilding (p
)anking footprints in BharatL.going to s%aller towns and reach the (n-)anked 8r. $all
added
List of comanies that had alied:-
IDFC
Bandhan Micro Finance
* Aditya Birla Nuvo, part of the Aditya Birla conglomerate, which includes Idea
Cellularand Hindalco Industries.
* Bajaj Finance, part of the Bajaj Group, which includes motorbike maker Bajaj Auto.
* Edelweiss Financial Services, a diversified financial services firm.
* IFCIa financial consultancy and advisory company.
* Indiabulls Housing Finance Ltd, part of the Indiabulls group conglomerate.
* India Post, part of the ministry of communications and information technology.
Indian post offices offer savings schemes and sell insurance and mutual funds.
* India Infoline, part of the IIFL group, which has interests in brokerage, wealth
management, insurance and consumer loans.
* INMACS Management Services Ltd, which provides management consultancy,
corporate finance, audit, tax and legal advisory services.
* Janalakshmi Financial Services, a microfinance company.
* JM Financial. Former CitigroupCEO Vikram Pandit would become non-executive
chairman of JM's banking arm if it wins a license.
* LIC Housing Finance, a unit of Life Insurance Corp of India, the country's largest
insurer.
* L&T Finance Holdings(, part of India's largest engineering conglomerate, Larsen &
Toubro.
* Magma Fincorp, a finance company that gives loans for vehicles, gold and small
enterprises.
* Muthoot Financegives loans against gold.
* Reliance Capital, controlled by billionaire Anil Ambani. Japan's Sumitomo Mitsui
Trust Bank and Nippon Life Insurance of Japan would each own stakes of between 4
and 5 percent in the proposed bank.
* Religare Enterprises, a financial services firm controlled by the Singh brothers who
also control Fortis HealthcareU.S.-based bank Customers Bancorp Inc(CUBI.O) will
invest $51 million in the bank if the group gets a licence.
* Shriram Capital, part of the Shriram Group, which includes truck financier Shriram
Transport(SRTR.NS).
* Smart Global Ventures.
* SREI Infrastructure Finance, which mainly finances infrastructure projects.
* Suryamani Financing Co Ltd, a financial services provider.
* Tourism Finance Corp of Indiawhich provides financial services for tourism-related
activities.
* UAE Exchange India, a remittance and foreign exchange services firm.