Mumbai: Universal bank licences will now be available on tap, with the Reserve Bank of India (RBI) on Monday releasing the final set of guidelines for eligible entities to apply for licences as and when they choose to, and keeping the doors closed to large business houses.

Non-banking financial companies (NBFCs), qualified individuals and some private companies will be eligible to apply for licences.

NBFCs that are part of large conglomerates with more than 40% of their total assets coming from non-financial businesses will not be eligible.

The new rules, which follow draft guidelines released on 6 May, mark a departure from the current stop-start policy where RBI opens the window for bank licences periodically but rarely.

RBI, under governor Raghuram Rajan, has been making an effort to create a more diverse banking sector that can better serve the contemporary economy. Since Rajan became governor in September 2013, RBI has licensed two universal banks (IDFC Bank and Bandhan Bank) in addition to a slew of payments banks and small finance banks to expand access to financial services.

Rajan has also proposed more differentiated licences for wholesale banking and custodian banking to make the sector more diverse. Putting universal bank licences on tap takes the process further.

“The guidelines will motivate seasoned professional bankers to apply for a licence and create a banking institution hopefully with a differentiated business model which could fulfil the aspirations of a growing young population," said Vimal Bhandari, managing director and chief executive officer at Indostar Capital Finance.

Those who will be eligible to apply for licences include NBFCs that are controlled by resident Indians and have a successful track record of at least 10 years. In addition, individuals and professionals who are residents and have more than 10 years of banking experience can apply.

In its final guidelines, RBI has stuck to its long-stated principle of keeping industrial houses away from the banking sector in order to avoid any spillover of risks.

“...large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10%," said RBI.

There is, however, a small window for private companies to apply.

“Entities/groups in the private sector that are ‘owned and controlled by residents’ and have a successful track record for at least 10 years", will be eligible to apply if the entity has total assets of less than ₹ 5,000 crore.

For an entity that has assets of more than ₹ 5,000 crore, the non-financial parts of its business should not account for more than 40% of total assets.

Sufficient checks and balances have been included to prevent new banks from being exposed to other operations of an eligible entity.

For instance, the bank is precluded from having any exposure, including investments in the equity and debt capital instruments of its promoters, major shareholders who have a stake exceeding 10% in the parent, the relatives of its promoters as also the entities in which they have significant influence or control.

The final norms largely mirror the draft guidelines released in May.

The initial minimum paid-up voting equity capital for a bank shall be ₹ 500 crore. Thereafter, the bank will need to have a minimum net worth of ₹ 500 crore at all times, the central bank said. Foreign shareholding in universal banks would be as per existing rules and hence capped at 74%.

The requirement of setting up a non-operating financial holding company (NOFHC) has been made an option instead of being mandatory. Individuals or a standalone promoting entity need not form an NOFHC to set up a bank, said RBI.

However, if other group businesses are proposed to be set up after the bank is incorporated, the bank will have to move towards an NOFHC structure.

The central bank also said promoters need not own more than a 51% stake in the NOFHC, compared with the 100% ownership mandated in the draft rules. No entity other than a promoter can wield significant influence over the NOFHC, said RBI.

The holding company structure is keeping in mind the need to ring-fence banking operations from other businesses of the promoter.

“These guidelines are more or less similar to what the draft guidelines had submitted. The RBI has kept the doors open enough for an eligible conglomerate to apply for the license," said Abizer Diwanji, partner and head, financial services, EY.

“It is encouraging a liberal interpretation of the guidelines. The regulator can then decide what it wants to do. The one thing that the RBI has clarified beyond doubt is the NOFHC structure, which is great," he added.

Notwithstanding many onerous requirements, past applicants for a banking licence who failed to get one are willing to give it another shot.

“We at UAE Exchange India are happy to know that the RBI has issued the guidelines for announcing the ‘on tap’ licensing of universal banks in the private sector. This is really encouraging for NBFCs like ours which has completed over 10 years and is compliant to all other submissions," the company said in a statement.

UAE Exchange India is the Indian arm of a United Arab Emirates entity dealing mainly in remittances. It applied for a small finance banking licence in the last round in 2015 but failed to get one.

Given the process is on tap, companies can apply at any given point in time and after a screening by RBI, eligible applications would be referred to a standing external advisory committee, said RBI.

The new banks will have to adhere to all the existing prudential regulations that apply to banks including opening of 25% of the total branch network in unbanked rural areas and exposure norms.

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