It’s finally here. RBI has announced guidelines for new private sector banks. Phew. The first paragraph says why I’m thankful:
Over the last two decades, the Reserve Bank of India (RBI) licensed twelve banks in the private sector. This happened in two phases. Ten 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, and fresh applications were invited. The applications received in response to this invitation were vetted by a High Level Advisory Committee constituted by the RBI, and two more licences were issued.
In twenty years, when our GDP has gone up 12 times (from 7.5 lakh crore to 90 lakh crore) we have had just a piddly 12 more banks, and then there has been consolidation of banks since then, cramping supply. Even now, more than 70% of all deposits are concentrated in the top two or three cities. We have always needed more banks, and finally RBI has come through with guidelines. (Note that this wasn’t entirely RBI’s fault – the situation became political as corporates wanted to set up banks to fund themselves, and used their political influence to stymie RBI’s requests for more power)
The new guidelines state that
- New banks can be started by residents or by NBFCs converting themselves, with at least Rs. 500 cr. of capital.
- New banks will be held by a financial holding company that holds all the financial assets of the promoter group. So if an entity that is currently a broker or an NBFC applies, the holding company will have to hold the promoter shares in that entity, and the RBI will regulate the holding company. Stock Brokers, Insurance companies etc. can apply as well, under this rule.
- The holding company must own at least 40% of the bank for five years. In fact, after three years it has to hold exactly 40%. Within ten years, this needs to come down to 20%, and within 12 years, 15%.
- The capital adequacy Ratio (CAR) of the new banks should be at least 13%. (My Note: But this can be “organized”.)
- Banks need to list (not the holding company, but the bank) within 3 years.
- Foreign shareholding cannot exceed 49% in the first five years, and no single foreign shareholder can own more than 5%.
- There are detailed regulations for holding company exposures, consolidation, valuation etc.
- No single entity can hold more than 10% of voting capital, with RBI approval required for any increase that takes it to more than 5%.
- Banks need to have core banking upfront, a customer grievance procedure rightaway, and have 25% of branches in rural “unbanked” areas.
A Few Notes from my side
While this might seem a positive it will take years to unravel. New approval can take years, which is the unit of resolution that RBI thinks at. The approvals can by stymied by unnecessary legal hassles like “get this paper” or “get that no objection certificate”. RBI should avoid this, as it will be pressured by competitive entities to slow things down.
New banks have a slew of regulations to take care of. I have been involved with RBI reporting requirements at my consulting gig in iCreate, and the scale of things that need to be taken care of is immense. For example, a bank can’t just give a loan against some collateral: it needs to record not just who a borrower is, but also how he intends to use the money, in which geography, and whether such a thing applies to the “priority sector” and how it’s tracked. More complex reports that are in the pipeline envisage a much broader role for statistical computations like VaR (Value at Risk) at every sub layer of the bank’s operations (based on term or sector or other parameters).
The investment in technology for a new bank will be huge, but this also means they should be able to handle their operations better. For instance, using Overnight Index Swaps to handle Asset Liability mismatches (floating versus fixed) can be modelled through market prices, a feature many current banks don’t seem to have at this point. Similarly, risk analysis can be dramatically expanded by using a combination of public data and collected information, like Maps, agricultural data, market prices and social network information.
The “rural unbanked” branches is a small problem since new banks need to source business from where there is a lot of money. However, the definition of underbanked and unbanked gives new banks some flexibility in getting the best bang for their buck; it is, for instance,more useful to find if an “unbanked rural” area lies right next to an area with a lot of money.