In this article, Dipti Khatri pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses RBI guidelines for business structuring of a bank.

The definition of “banking” as per Section 5(b) of The Banking Regulation Act,1949 includes “ accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise”.

At the first instance, it is important to note that RBI is the main body which issues guidelines relating to banking company. Also, as per Section 22 of Banking Regulation Act, 1949 for carrying out a banking business it is required to hold a license issued in that behalf by the Reserve Bank of India. Hence, a business activity of a banking company should be in consonance with the guidelines issued by RBI.

Guidelines issued by RBI relating to banking Companies

1. Guidelines for licensing of payment banks

• Registration, licensing and regulations – The payment banks are to be registered as public limited company under Companies Act, 2013 and also Section 22 of the Banking Regulations, 1949 is required to be followed. Further, guidelines which are issued by FEMA, 1999 and other relevant statutes are required to be followed from time to time. Also, the payment bank will be given scheduled bank status once it operation commences.
• Objectives- The objective is to provide financial benefit to the unorganized sector, migrant labour force, and small businesses by providing small saving accounts.
• Eligible promoters- Payments banks may be set up by Non-Banking Financial Companies (NBFC’s), Pre- paid payment insurance (PPI), other public sector entities. Also, a promoter group can set up commercial bank as payment bank to the extent permitted under Section 19(2) of the Banking Regulation Act, 1949. However, the requirement is that the promoter group as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to promote payment banks.
• Scope of activities – The payment bank will be set up as differentiated banks and will be eligible for acceptance of demand deposits, issuance of ATM’s / Debit cards, business correspondents (BCs), and act as a channel for RTGS/ NEFT/ IMPS.
• Deployment of funds- The payment bank will not be eligible to undertake lending activities. Also, the payment bank will participate in payment and settlement system.
• Capital requirement- The capital market will not be exposed to operational risk. However, they will be exposed to credit and market risks. Therefore, as a backstop measure, the payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
• Promoters’ contribution- Promoters of the payment bank are required to hold a minimum limit of 40% of paid up equity capital for the first five years from the commencement of the business.
• Foreign shareholding- Foreign Shareholding would be according to the FDI policy as stated by the Private Bank and as amended from time to time.
• Voting rights and transfer/acquisition of shares – 10% capping is done in the private sector banks. However, according to Section 12B of the Act, it can be raised.
• Prudential norms- of RBI are not applicable to payment banks.
• Business plan- The payment bank will be required to put forward their business plan to address the objectives of payment bank. Also, the business plan related to technological solutions, ATMs, BCs are required to be dealt in detail.
• Corporate governance- It should have majority of Independent directors. Also, they are required to follow the corporate governance norms set up by RBI.
• Procedure for application – Application should be set in accordance with Rule 11 of the Banking Regulations Act, 1949.
• Procedures for RBI decisions- The RBI will give its decisions after looking into ‘fit and proper criteria’. Also, the eligibility of the directors and its members will be considered. Also, the name of the applicants and other major documents are to be placed on the RBI website.

2. Guidelines for licensing of small finance banks

• Eligible promoters: Non-banking Financial Companies (NBFCs), Local Area Bank (LABs), Micro Finance Institutions(MFIs), Resident individuals with 10 years of experience in banking and finance.
• Foreign shareholding- to be 74% for private sector bank, Individual NRI restricted to 10%.
• Promoter’s Contribution- Initial contribution is required to be 40% from the date of commencement of the business. Net worth if reached beyond Rs. 500 crore than listing is mandatory within 3 years of reaching the net worth.
• Minimum Capital Requirement- The minimum requirement would be paid up equity capital of at least Rs. 100 crore.
• Corporate Governance and Structure- The Small finance bank is required to have majority of independent directors to fulfil the corporate governance norms. Further, the ‘fit and proper criteria’ is required to be fulfilled by the applicants. Also, it is mandatory to mention “small finance banks” to differentiate it from other banking companies.
• Scope of activities- Its activities will include acceptance of deposits, distribution of mutual fund, pension products etc.
• Branch geography expansion- Initial five years would require the approval of RBI. However, after that RBI may liberalize the approval policy.
• Prudential Norms- Prudential norms will be same as that applicable to the Commercial banks. Also, CRR and SLR policy will remain the same. The maximum loan and investment limit will extend as per the direction given by RBI.
• Business plan- The business plan will be required to be submitted for approval from RBI. The business plan is required to include bank’s expansion and other business policies.
• Other conditions- The small finance bank will have to go through the scrutiny of RBI’s banking ombudsman scheme, 2006. Further, it will also have grievance cell to handle the complaints.
• Additional conditions for NBFC/ MFI/ LAB- Small banking finance Companies are precluded from creating floating charges. Also, on creation of small banking finance company NBFC will cease to exist.

3. Master Circular

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) – The guideline has been issued under Section 35A of The Banking Regulation Act, 1949.The master circular will be applicable to the scheduled commercial banks excluding the regional banks. Also, it has been issued under Section 42(1) of the RBI Act, 1934 for monetary stability.

The salient feature of the above circular includes:

• CRR is required to be maintained at 4% of a bank’s total of demand and time liability.
• There are demand liabilities which are to be paid on demand.
• Time liabilities- will also have to be paid on demand.
• Other Demand and Time Liabilities (ODTL) includes interest accrued on deposits, bills payable, unpaid dividends. The balance outstanding in the blocked account pertaining to more than 5 years in inter branch adjustment will also be included in ODTL. Accrued interest is also to be calculated on each reporting fortnight so that bank’s liability in this regard is fairly reflected in total NDTL of the same fortnightly return.

4. Master Circular Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

The guideline are made in consonance with “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002”. The guideline is applicable to: – Non-performing assets which include (a) Sub-standard assets (b) Doubtful assets (c) Loss Assets. The Act also recognizes the sale of non- performing assets for the realization of dues from the borrower or the guarantor under the provision of the Act 2002.

5. Draft Guidelines for ‘on tap’ licensing of Universal Banks in the Private Sector”

This draft guidelines were published on 5^th May 2016. It includes NBFC’s that are ‘controlled by residents’ and have a successful track record for at “least 10 years. It also includes individuals/ professionals who have 10 years of experience in the banking sector. Fit and proper criteria include promoter group having a sound record of at least 10 years. With respect to corporate structure the Non- operative financial holding Company (NOHFC) is not mandatory for individual promoters or standalone which do not have group entities. Also, promoter can own not less than 51% of the total paid up equity capital of the NOHFC. Also, they are permitted to undertake specialized activities with the prior approval of Reserve Bank.

Procedure for Application

• The application can be submitted to the Reserve Bank of India at any point of time as the licensing window will be open on-tap.
• The Reserve Bank will set up the applications to be referred to the Standing External Advisory Committee (SEAC).
• The Committee is required to submit the recommendations to the Reserve Bank of India.
• The decision to issue in principal approval is required to be taken by the Reserve Bank.
• The validity of the approval will be 18 months from the date of grant of in- principal approval and thereafter lapse automatically. Also, The Reserve’s Bank of India decision is to be considered as final.
• In order to ensure transparency, name of applicants for grant of in principal approval will be placed on Reserve’s bank website automatically.

References

1. Reserve Bank of India- Guidelines for licensing of payment banks https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2900 (last visited 21^st December, 2016).
2. Reserve Bank of India, RBI decides to grant “in-principle” approval for banking licences https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30931 (last visited 21^st December, 2016).
3. Reserve Bank of India, “Draft Guidelines for ‘on tap’ licensing of Universal Banks in the Private Sector” https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=36898 (last visited 22^nd December, 2016).
4. Delloite RBI guidelines for License of Small Finance Banks https://www2.deloitte.com/content/dam/Deloitte/in/Documents/financial-services/in-fs-deloitte-pov-on-small-finance-bank-license-guidelines.pdf(last visited 22^nd December, 2016).
5. Reserve Bank of India Master Circular No. DBOD.No.BP.BC.9/21.04.048/2014-15 dated July 1, 2014 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/101MC16B68A0EDCA9434CBC239741F5267329.PDF (last visited 22^nd December, 2016).