Banking Licenses and RBI RegulationsPresentation at Bangalore Branch SIRC | December 29, 2012CA. Raghav

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Why Discuss Bank Licenses?• Bank Licenses lie at the core of reforms with nexus to other

arms of the economy• There is a positive correlation between size of the banking

system and long term economic growth (Goldsmith 1969, King and Levine 1993)

• BCG Has predicted that Indian Banking Sector is going to become the third largest in the world by 2025• Assets moving from USD 1,350 billion to USD 28,500 Billion

• As important participants in the market economy we need to know the latest developments

• We are also in a position to form an opinion and influence decision making 2

Why Now• Recent focus on Financial Inclusion has led to the conclusion

that Existing banks may not be able to meet demands even if there is some consolidation

• FM made a Budget Announcement Committing to allow new banks (Feb 2010)

• RBI has issued Discussion paper in 2010 and Draft Guidelines in 2011 and 2012

• The Banking Laws (Amendments ) Bill passed in Lok Sabha in December 2012

• Developments promise to have a profound implication for practitioners in coming decades

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What is Required to be a Bank?• Governed By Section 22 (1) of Banking Regulation Act, 1949• “……no company shall carry on banking business in India unless it

holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the Reserve Bank may think fit to impose.”

• Section 22(3) further stipulates that RBI must ensure inter alia• Solvency• Best interest of Depositor and General Public• Monetary Stability and Economic Growth• General Character of the management (Genesis of ‘fit and proper

management’)• Some Banks regulated by specific acts passed in the

Parliament for their creation 4

Indian Financial System

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The Indian Banking Journey• Bank of Hindusthan, General Bank of India1770, 1786

• Bank of Bengal, Bank of Bombay, Bank of Madras (All by East India Company – Hence ‘Presidency Banks’) – Amalgamated to form Imperial Bank of India – And then renamed as SBI

1809, 1840, 1843, 1921, 1955

• Allahabad Bank – First to be run by Indians18691865

• 1100 Small Banks Established1906-1948

• Reserve Bank of India, Banking Regulation Act1935, 1949

• First 14, then 6 Commercial Banks Nationalised 1969, 1980

• 10 New Private Banks allowed to operate, Kotak and Yes Bank allowed to operate1993, 2004

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Size of the Banking Sector

19611963

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

0

50

100

150

200

250

300

350

400

IndiaChinaBrazilRussian FederationSouth AfricaUnited KingdomUnited StatesEuropean UnionJapanDo

mes

tic C

redi

t % to

GDP

Source: data.worldbank.org

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Size of Select Banks

0

500

1,000

1,500

2,000

2,500

3,000

0

50

100

150

200

250

300

Total Assets (Sept) 2012 Market Cap (Jan) 2012

Ass

et S

ize

in U

SD B

illio

n

Mar

ket C

ap n

USD

Bill

ion

Compiled from Internet sources

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The Banking Laws (Amendments) Bill, 2012• Big Changes• Removes Cap on Authorised Capital for Banks (was Rs. 3000

Crore) and allows them to issue bonus and rights shares• Ceiling on voting rights in Nationalised banks from 1% to 10%• Restriction on 10% voting right per shareholder on private banks

removed• Power already given to RBI to remove any director or officer of a

bank. RBI now allowed to supersede the board of a Bank and to appoint an administrator for 12 months

• Banking Company mergers exempted from Competition Commission jurisdiction

• Ownership of 5% or more requires RBI approval• Depositor Awareness and Education Fund to be set up 9

Draft RBI Guidelines

Group Holding Co

Financial NOHC

Banking Company

Other Finance

Enterprises

Other Business

Subsidiary (1)

Other Business

Subsidiary (n)

Subsidiary of Subsidiary

Other Group Co’s

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Some Important Features• Groups with a track record of 10 Years eligible to apply• Minimum Capital Requirement of Rs. 500 Crore• NoHC to Own minimum 40% in Banking Co. Any amount in

excess of 40% to be sold off in 2 years• NoHC holding of 40% to have a lockin of 5 years• Holding to reduce to 20% in 10 years and 15% in 12 years• 49% FDI for first 5 years• 50% board to be Independent director + Separation of

ownership and management• CBS from day 1• Listing within 2 years• 25% branches in unbanked areas• NBFCs to have option to convert

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Private vs. Public• What has been the impact of liberalisation• What is the role of competition

• Role of PSUs in the Crisis• Do they take less risk or more?

• What is the ability of Government to capitalise PSU banks regularly

• Is there a demand supply mismatch?

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One Time Window vs. License on Demand • Should banks be viewed as perpetual animals ?• What is the likelihood of a new bank surviving?

• Is Merger to be viewed as a failure?

• Is this problem specific to India?

• Is there a concern on ability to regulate a large number of Banks?

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THANK YOU

Closing Thoughts

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