Prospects of ‘on tap’ licensing towards banking reforms

On tap licensing is a new Universal Bank licensing approach, where by the window for getting a bank license from Reserve bank of India is open throughout the year. On tap will allow Individuals, Groups, Companies or Entities can apply for bank license whenever they wish to apply without any restriction of time frame or periodical window for application.

Reserve Bank of India was following stop-start policy in licensing Private Sector Universal Banking maneuvers, where RBI unseals the window for bank licenses periodically. To serve the contemporary economy of India, RBI has proposed differentiated license to make banking sector more diverse through putting ‘on tap’ licensing of Universal Bank.

On 1^st August 2016, RBI released recommendations for on tap licensing of Universal Banks in Private Sector, allowing Resident Individuals, Entities/Groups in Private sector and NBFC’s to apply for bank licenses as and when they choose to. With this notable new guidelines issued by RBI, the process of achieving license has become more convenient and likely to institute significant change in the Private sector banking industry. RBI has stuck to its long stated principle of keeping Industrial houses away from the Banking sector in order to avoid risk of spillover.

Highlights of New Norms:

• Individuals/Professionals who are ‘residents’ and have 10 years of experience in Banking and Finance at a senior level, appropriate to become Promoters.
• Entities/Groups in the private sector that are ‘owned and controlled by residents’ and have successful track record of at least 10 years, with total assets of INR 50 billion or more, nonfinancial business of group does not account for 40% or more in terms of total assets/gross income.
• Existing NBFC that are controlled by ‘residents’ and have successful track record of at least 10 years. Any NBFC, which is a part of group that has total assets of INR 50 billion or more and non-financial business of group account for 40% of more in terms of total assets/gross income, is not eligible.
• Promoter/Promoting entity/Promoter group should have past record of Financials, Integrity and minimum 10 years of track record to pass ‘Fit and Proper’ criteria.
• Non-Operative Financial Holding company has to be formed in case of individual Promoters/Entity/converting Entities, whereas requirement of who do not have other group entities.
• No Shareholders, other than Promoter/Promoter group, shall have significant influence and control in the NOFHC.
• Initial minimum paid up voting capital is INR 5 billion with INR 5 billion net worth all the times.
• Foreign shareholding would be, as per existing aggregate foreign investment limit of 74%.
• Business plan must be Realistic and Viable to achieve Financial Inclusion.

Hurdle for large industrial houses:

One of the major hurdle of  on tap licensing norms is that the Big Corporates will be out of race to apply for Universal Banking license. New licensing norms restricts the role of large entities to invest up to 10% and cannot apply as eligible Entities. The Main objective is to curb misusing of public money, where possibility of lending money to related party. No big corporate house should dream of becoming a bank now, unless they can outsmart the regulator by acting in concert with interested parties.

How different RBI new policy?

• RBI initiative through new policy aims at licensing to Entities/Promoters who are serious about Banking business and who can mobilize the resources needed with Professional Management of new age Universal Banks.
• RBI reconciles the interest of multiple Institutions and Regulators to ensure smooth and competitive functioning of banking system.
• It addresses the consolidation and prioritization of small Private sector Banks and Professionalization of working of Cooperative Banks.
• With stringent norm of at least 25% of new Universal Banks branches in unbanked rural areas (population up to 9999 as per latest census) it promotes Banking habits in rural areas to achieve the economic stability.
• RBI also aims at Priority sector lending (at least 40% of their loans to economically weaker section) through target and sub target which enables development of Agriculture and Manufacturing sector.
• Window will open ‘on tap’ and the application in the prescribed format along with supporting information can submit at any point of time, than previous norms of the periodical window for application.
• Under new licensing norms applications will be scrutinized with great due diligence through Standing External Advisory Committee, who provide recommendation for approval.
• RBI ensures transparency by placing the names of applicants for bank licenses and suitable applicant for grant in principle approval on the Reserve Bank of India website periodically.

1^st August 2016 was remarkable day in the Banking sector, with release of guidelines of ‘on tap’ licensing Universal Banks in Private sector.

New policy made convenient for Individuals, Entities/Group of Private sectors and NBFC’s to apply for license at any time. All Entities/Promoters has to follow ‘fit and proper’ criteria to be eligible to apply for Universal Bank license with proven Track record, Capital requirements and other Regulatory aspects.

Large Entities allowed to invest up to 10% to ensure no spillover of Public money. Differentiator of new licensing policy includes, Seriousness of banking business, Multiple Institutional interest, reaching to Rural/Weaker section of the Economy, Stringent Due diligence and Transparency.