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Introduction:

Article from the Hindu Times dated 23rdAugust 2010.

Based on the RBIs 81-page Discussion Paper regarding

New Bank Licenses.

Evaluation of the 81-page discussion.

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RBI tries to be Objective

Setting up of an Independent Expert Group to deal

impartially with the subject.

Parameters considered- Balance sheet

Net worth

Experience

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Key Points of the Discussion Paper

Minimum capital requirement for new banks

Allowing NBFCs to convert into banks

Allowing Industrial and Business Houses to promotebanks

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Minimum capital requirement for new

banks

Possible Solution 1:

Having a Low Minimum Capital Requirement (more thanRs.300 Crore)

PROS:

Attraction of serious participants

Optimum utilization of capital from the beginning

CONS:

Non-serious participants with inadequate financial banking

Disadvantages in scale and scope for small banks

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Minimum capital requirement for new

banks

Possible Solution 2:

Having a High Minimum Capital Requirement (Rs.1000Crore)

PROS:

Attraction of participants with sufficient financial backing

Ability to invest resources in technology

CONS:

Promoters may back out because of the High Capital Inclusion

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Minimum capital requirement for new

banks

Possible Solution 3:

Initial minimum capital with option of raising the amount(eg. Initial Capital Rs.500 Crore with a condition to raise

to Rs.1000 Crore within a period of 5 years)

PROS:

Dilution of Promoters stake

CONS: Could invite not very serious applicants

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Allowing Industrial and Business

Houses to Promote Banks

Possible Solution 1:

Permission for any Industrial Houses to Promote Bank

PROS:Ability to fulfill needs of Large Capital Investment

Entrepreneurial & Managerial talent could be harvested in theBanking Sector

CONS:

Involvement of dealing with public money makes it important to keepIndustry and Banking separate

Downturn in Business/ Industrial houses maybe a threat to thefinancial stability of their promoted Banks

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Allowing Industrial and Business

Houses to Promote Banks

Possible Solution 2:

Allowing Financial Sector Industrial Houses to setup new

banks

PROS:

Professional Skills an Expertise of Industrial & Business housescould add value to the bank

CONS:

Concentration of economic power in all areas of Business could be athreat to financial stability

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Allowing Industrial and Business

Houses to Promote Banks

Possible Solution 3:

Allowed to take over RRBs

PROS: Immediate impetus and revitalization of RRBs

Industrial/ Business Houses get an opportunity to prove suitability

CONS:

Requirement of legislative changes

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Allowing NBFCs to Convert

into Banks

Possible Solution 1:

Permitting conversion

PROS:Already regulated by RBI and have a track record

Success of NBFCs in lending activities

CONS:

Conversion would require closure of a number of branches &withdrawal from many business segments

Financial stability issues like Short Term Borrowings & Deposits

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Allowing NBFCs to Convert

into Banks

Possible Solution 2:

Allowing standalone NBFCs to promote banks

PROS: Expertise of NBFCs in the Financial Sector

Improved Governance in Banks due to ownership by entitiesexperienced in financial sector

CONS:

Usage of bank funds to meet with NBFC liabilities Insufficient financial strength to support the Banks financial needs

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Recent Banking History Previous guidelines were issued in 1993

10 New Banks came into existence out of which

only the 4 banks which were promoted by

institutions have flourished (eg. ICICI, HDFC,UTI & IDBI)

The banks promoted by individuals were

unsuccessful

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Presented by:

Abhishek Pore 3

Anil Jain 13

David DPenha 33 Khanjan Chokshi - 60