New norms for licences on-tap applauded but applicants wish for more transparency and objectivity in the process
ver since the Indian financial sector was opened up in 1991, the gates to allow a private entity to start a bank were opened only three times. The ‘stop & go’ approach has finally given way to a continuous or ‘on-tap’ licensing regime with the Reserve Bank of India (RBI) announcing draft norms for such a scheme. Comments are invited by June 30, after which the final norms will be released.
After taking charge in September 2013, Raghuram Rajan, the RBI Governor, expedited the licensing process and granted licences to 23 entities during his two-and-half-year tenure. Two of them were universal banks while the rest were niche banks – payments banks and small finance banks, which were awarded differentiated licences.
The RBI has now initiated a move to the ‘on-tap’ regime for differentiated licences too.
The draft norms are itself an important milestone in the country’s banking landscape. While the norms are more or less in line with the 2013 new bank licence norms, this time the central bank has made it clear that entities involved predominantly in finance will be encouraged.
Some features of the draft norms include: a minimum capital of Rs.500 crore, a 10-year track record, requirement of 10 years’ experience for individual applicants in banking and finance, minimum 13 per cent capital adequacy ratio for three years, promoters’ stake to be reduced to 30 per cent over 10 years and to 15 per cent over 12 years and the bank to be listed on the stock exchanges within six years. Banking aspirants have raised a few questions on the draft norms and said they would seek clarifications from the regulator.
External committee needed?
The RBI had said it would form a standing external advisory committee (SEAC) that will vet the applications after the initial screening is done by central bank staffers. The committee is to have a three-year term and will comprise eminent personalities from the banking, financial and other relevant sectors.
This has baffled prospective applicants and former bankers. The RBI had set up similar committees during the earlier round of the licence process for universal banks as well as for niche banks.
It was argued the last round, in which IDFC and Bandhan, obtained licences in 2014, was carried out almost after a decade (the licensing process itself took more than four years), and that the RBI may not have the required skill set to vet applications which came from a wide variety of institutions – from micro lenders to complex business conglomerates. So, the external committee, consisting of a former RBI governor, a former Securities and Exchange Board of India (Sebi) chairman and an RBI deputy governor, was set up to guide the regulator.
“The RBI grants licences to primary dealers, non-banking finance companies and even to foreign banks to operate in India, without any external help. So why do they need a committee only for domestic bank licences?” asked a senior banker on the condition of anonymity.
Examples of other financial sector regulators were also cited – the Insurance Regulatory and Development Authority of India (IRDA) and SEBI, which also offer on-tap licences to insurance companies and stock brokers, without any external help. “Now that on-tap licensing has been proposed, the RBI should set up a separate department to look into only licensing issues,” said the chief executive of a firm that had applied for a bank licence earlier.
No timeframe?
The central bank has tried to make the process on-tap licensing process transparent. For example, for the first time, it has allowed unsuccessful candidates to appeal to the central board of the RBI. Unsuccessful candidates can also apply again, after three years from the date of rejection.
While the RBI has said it will communicate its decision to the unsuccessful candidates as well, it has not specified any timeframe by which a licence will be awarded or declined. The last time around, applicants felt that the process was rather prolonged. While the entire process took over four years (it started with the Budget speech in February 2010 and ended with the grant of licences in April 2014), it took RBI more than a year to decide, after the final norms were announced. The year 2014 was also an election year. Allegations flew fast and thick as to the timing of the grant – whether they should be announced before or after the general elections. “The RBI has said that they would communicate to us if our applications are rejected. But when? We cannot wait for eternity,” said a prospective applicant.
Reasons for rejection?
Applicants from past rounds feel that the central bank, known to be a conservative regulator, seldom communicates the cause for rejection. During the recent universal bank licence process, the central bank had rejected over 20 applications, but did not communicate the reason for rejecting those applications, it is learnt. The same was repeated for differentiated bank licences where more than 90 applications were rejected. “They did not tell us why our application was rejected. This would have helped us understand the shortcomings, from the regulatory point of view,” said an applicant whose payments bank application was rejected. There is a demand from bank aspirants, in order to ensure transparency, that the central bank should make public reasons for rejecting bank licence applications.
Not to all eligible?
In the draft norms, the RBI had said entities or individual promoters would be found be fit and proper if they had 10 years of banking experience or running their respective businesses, sound credentials and integrity, sound financials, and diversified shareholding pattern among promoting entities.
At the same time, the regulator said, “Banking being a highly-leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements…it may not be possible for RBI to issue licences to all the applicants just meeting the eligibility criteria.”
Prospective applicants said if the objective is to allow financial services to reach the remotest part of the country, adding only a few banks will not solve the problem.
“The licensing process should be rule-based and not discretion-based. If the applicant meets the eligibility criteria, it should be awarded the licence. That is why it is all the more important that RBI should spell out why an application is rejected,” said a prospective applicant.
Why not business houses?
It is clear from the guidelines that the central bank wants entities that are predominantly in financial services.
Diversified business houses such as the Tata group, Birla group and the Mahindra group had earlier applied for bank licences (The Tata group had withdrawn its application later). Many of these groups may now find themselves ineligible because the regulator has stipulated that “the non-financial business of the group does not account for 40 per cent or more in terms of total assets / in terms of gross income.”
“The big change in guidelines comes in the form of excluding large industrial houses from being promoters, and cap their shareholding to 10 per cent,” Jefferies Equity Research said in a note.
It is learnt that the central bank had also taken note of the challenges in the insurance sector, which was opened up more than 10 years ago to the private sector. Compared to peers, India’s insurance penetration is still low. Further, with the increase in the foreign direct investment cap, many promoters in insurance are cashing out, indicating poor interest in the sector over the long-term.
The RBI has made it clear that entities predominantly in finance will be encouraged
