Amendment in Banking Laws

The Banking Laws (Amendment) Bill, 2011 is an importance milestone in the banking industry and it is expected to reap long term profit for the sector and for the economy as well. The bill has taken into consideration the importance of financial reforms which is the need of hour for the Indian financial sector. The Apex bank, RBI has issued regulations pertaining to the issuing of new banking licenses. Some of the salient amendments that were demanded by the RBI as pre-requisite to get banking license from the regulatory body are as under:

• The power of RBI has been enhanced as apex bank demands the power to supersede bank boards for a period not exceeding 12 months, which is not available under the current regulation
• Option to inspect the information and returns from associate enterprise of banking companies to be given to RBI so as to improve on transparency. This will ensure to check if the regulatory norms as laid by the body is followed in the right manner or not
• Raise cap on voting right to 26% in private banks and to 10% in PSU banks from the existing 10% and 1% respectively
• In case of M&A transactions also the RBI reserved the right to approve any M&A deal in case of banks which are under trouble. For rest, the Competition Commission of India will approve M&A.

Impact on the Indian Banking Sector

For the Indian banking sector, the bill is expected to be a long-term positive step which will gradually pave the way for increased competition in the sector. The new licenses will result in rolling out of more efficient and valuable banking system. Talking about the steps mentioned in the bill, the 10-fold increase from current 1 percent voting right in case of PSU will help drive increased investor interest and hence facilitate raising additional capital. In order to implement the BASEL III guidelines in the banking sector, it is necessary to maintain a certain amount of core capital in the form of Tier 1 and Tier 2 capital. The move will help in raising such capital at a comparatively easy manner done previously.

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The Proposed New License Guidelines are summarized below

• Only India resident groups / entities will be allowed to promote a bank
• A minimum track record of 10 successful year’s business is required before approval for promoting a bank. The verification of business run previously will be carried out by RBI through its dedicated agencies
• Significant exposure in Real Estate and Capital Market (10% or greater of income or assets or both) will not be eligible for a new license
• The bank will have to be set up as NOHC which is a wholly-owned non operating holding company. This will house the bank and other financial services subsidiaries
• The NOHC will be registered as a NBFC with the RBI and will not be allowed to borrow funds for investing in the companies held by it
• The source of promoter’s equity in the NOHC should be transparent and verifiable
• Minimum paid-up capital to be INR 5bn where in the NOHC should hold a minimum of 40% of the paid-up capital which will have a lock-in period of 5 years from the date of license
• The NOHC’s stake should be reduced to 20% of the paid-up capital within a period of 10 years
• The stake is liable to be reduced further to 15% within 12 years from the date of licensing
• In case of FII, FDI and NRI stake, it should not exceed 49% in the first 5 years of the license date
• Non-resident shareholder cannot hold more than 5% of the paid-up capital
• Minimum of 50% of the board of directors of the NOHC should be Independent directors to ensure transparency in operations
• Any activity which can be done by the bank cannot be taken up by the financial services entity within the NOHC
• No new financial services entity can be set up by the NOHC for at least 3 years from the date of licensing of the bank
• Stock exchange listing to take place within 2 years of obtaining of license

To conclude we can say that the steps taken by RBI to promote banking license among the economy will definitely show a positive impact. This will result to improved competition in the coming years and will lead to improved transparency in the system.