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1 What will our New Private Banks LOOK like Aug 11, 2010
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What will our
New Private Banks LOOK like
Aug 11, 2010
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ENTRY OF NEW BANKS IN THE PRIVATE SECTOR
RBI came out with discussion paper on Aug 11, 2010 comparing the pros and
cons of various variables that it is trying to define.
Responses are due September 20, 2010
This is your chance to let RBI know what you want in a new Bank. After all,
Banking is one of the most important sector and also the reason why we are
going through this financial crisis.
Why new Banks
Foster Competition - Reduce cost, improve quality
Promote Financial inclusion
Five main issues for consideration. Each discussed in subsequent slides
Minimum
capital
Shareholding
Caps
Foreign
stake
Eligible
Promoters
Business
Model
3
Minimum capital requirements for new banks and promoters
contribution
1993
Rs100 Cr. Minimum capital
2001
Rs200 Cr. capital to be
increased to Rs300 Cr.
Option 1 Option 2 Option 3
LOW Capital
(but over Rs 300Cr)
High Capital
(Rs 1,000 Cr)
Start with Rs 500 Cr and
move to Rs 1,000 Cr in 5
years
Rs 300 Cr is the minimum that will be prescribed given 9 years have elapsed since
2001 and accounting for inflation, Rs 300Cr is justified as the minimum.
2010/2011
1
4
Minimum and maximum caps on promoter shareholding
1993 & 2001
Minimum 40% and lock in for 5 years.
Significant Shareholders- Max 10%
Option 1 Option 2 Option 3 Option 4
Retain
1993/2001
requirements
(40% and 10%)
All shareholders 5%
But for promoters/
significant
shareholders – max
20% in the long run
Allow promoters to
hold their initial
shareholding of 40
percent
Canadian Model Style
No restriction upto 5(or 10%)
Then
Max 40%
upto Rs1,000 Cr Bank capital
Max 30%
1,000-2,000 Cr Bank capital
Max 10% (or 20%)
Rs 2,000+ Cr Bank capital
2010/2011
2
5
Foreign Shareholding
2001
1. NRI – Max 40% (of which max 20% for Foreign bank)
2. Various other internal caps/restrictions over the subsequent years
Option
Foreign shareholding capped at below 50% and locked at that level for initial 10 years
Since the objective is to create strong domestic banking entities and a diversified
banking sector which includes public sector banks, domestically owned private banks
and foreign owned banks, aggregate non-resident investment including FDI, NRI and
FII in these banks could be capped at a suitable level below 50 percent and locked at
that level for the initial 10 years.
2010/2011
3
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Eligible Promoters - Industrial and business houses?
2001
1. Prohibited promotion of new banks by industrial houses
2. Individual companies connected with large industrial houses permitted to
acquire upto 10% in form of strategic investment
Option 1 Option 2 Option 3
Industrial and business
houses may be permitted to
promote banks
Industrial and business
houses that have
predominant presence and
experience in the financial
sector could be allowed to
set up banks
subject to other due
diligence process
As an intermediate step,
industrial and business
houses could be allowed
to take over RRB’s, before
considering allowing them to
set up banks
2010/2011
4A
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Eligible Promoters – NBFC conversion to Bank?
2001
NBFCs with a good track record allowed to convert into a bank. Some
conditions to have been met.
Option 1 Option 2
Permitting conversion of NBFCs into
banks
Permitting standalone (i.e. those not
promoted by Industrial / Business
Houses) NBFCs (including those
regulated by SEBI, IRDA & NHB) to
promote banks
2010/2011
4B
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Business Model
2001
Major stipulations
1. 40% target for Priority Sector Lending
2. 25% Branches in rural and semi urban locations
2010/2011
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Option 1 Option 2
Status- quo could be maintained where new
banks could be licensed under the usual
conditions.
For financial inclusion promotion, business
model could be required to clearly articulate
the strategy and the targets for achieving
significant outreach to clientele in Tier 3 to 6
centers (i.e. in populations
less than 50000) especially in the under
banked regions of the country either through
branches or branchless models
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What is RBI worried about?
Entry of many non-serious entities with inadequate financial backing seeking
banking licenses.
A low capital requirement could lead banks to run out of capital early
Banks being granted license, but not participating in financial Inclusion
Large number of small banks lead to weakening of supervision in the sector
Promoter threshold is very important. Very low levels could deter serious
promoters and the Bank may also lack vision
Larger promoter stake might risk diversion of depositor funds
Canadian model on promoter holding may mean that promoters will control
how fast the bank grows depending upon how much control they want over the
bank.
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Industrial Houses – Support for them
Industrial and business houses can be an important source of capital and can
provide management expertise and strategic direction to banks
Large industrial and business houses have already been permitted to operate
in other financial services sectors, such as insurance companies, asset
management companies and other non-banking finance companies including
loan and leasing companies
Industrial and business houses have a long history of building and nurturing
new businesses in highly regulated sectors
Industrial house’s wrong acts in Banking will affect reputation of other
businesses and so are likely to do the right thing more often.
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Industrial Houses – What are the risks
When banks are flush with liquidity, there is a great risk of diverting the funds
to liquidity constrained operations of the group
Conflict of interest is a big concern. Banks controlling which companies to lent
to, preferential rates to own affiliates etc.
Dealing with complex structures of the industrial / business houses with Banks
will pose difficulties in supervision and regulation.
Major operations of the industrial and business group may not be well
regulated which makes it difficult to assess the ‘fit and proper’ status of the
industrial / business group.
The complex web of relationships of commercial firms with their customers or
suppliers and proper monitoring of preferential access to credit would be very
difficult.
Financial Inclusion may not be top on agenda of Industrial Houses
In down turn, if Industrial House businesses are affected, it would spill over and
affect the bank promoted by these Houses and destabilize the financial system
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Risk from Industrial House Promotion - What can be done
Strengthening the governance guidelines of 'fit and proper' criteria on a
continuing basis.
Improved Corporate Governance Standards, corporate culture
The structure proposed for promoting banks should be such that the bank can
be ring fenced from other financial and commercial entities in the group.
Industrial and business houses promoting banks must have diversified
ownership.
Industrial and business houses engaged in real estate activities either directly or indirectly,
should not be allowed to promote banks
There could be stringent limits on transactions between the bank and other
entities in the Group to minimize the prospect of direct or indirect lending to
other entities in the Group
The Board could be mandated to have a majority of independent Directors and
the Chairman should be a part time Chairman
To avoid spill over effect of industrial house on Banks, the Group may not be
allowed to use the Logo for the promoted Bank
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References
Discussion Paper on “Entry of New Banks in the Private Sector
http://rbidocs.rbi.org.in/rdocs/content/PDFs/FIDIS110810.pdf
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