RBI to review new bank licensing norms for the private banks

The Reserve Bank of India (RBI) had first issued the guidelines for licensing new banks in the private sector in 1993 and after that it reviewed them in 2001. This year RBI is again reviewing the new bank licensing norms.

According to sources this time during the review RBI will be taking into account the minimum paid-up capital of the bank, nature of new entities to be allowed in the banking sector, promoters’ contribution in the paid-up capital, nature of promoters and corporate governance norms in the current scenario.

It is stated the net worth of new banks might be increased from Rs 300 crore at present also the corporate governance norms for promoters are likely to be tightened further. As per sources, the RBI might allow the entry of more private well-governed banks having higher capital adequacy and transparency norms, in accordance to the recommendation of the Raghuram Rajan committee on financial sector reforms.

The RBI will have the full control over the private sector banks as of local area banks; the apex bank will formulate norms for enhancing the financial viability of such bodies.

The Rajan committee in its report for small private sector banks has said that initially it will be an entry point for small entities in the banking system that can later grow into large banks.

The report also stated that in case of failure of a few small banks, there will not be much systemic risk as in case of single large bank. However the RBI will be reviewing existing norms for the conversion of a non-banking finance company (NBFC) into a bank, allowing a corporate house-promoted NBFC into a bank may not be examined at present. According to sources there are many large banks which should be made more efficient before allowing other large entities.

Also RBI is looking over the possibility of relaxing norms for entry of agency banks of Indian banks operating overseas or banks with whom Indian banks are having strong business connection overseas. But, RBI at present is not reviewing the roadmap for expansion of foreign banks in India, as this option is a part of the limited review.

The sources pointed out that other country regulators as accepting in their bank licensing policies for Indian banks in their countries as the Indian banking regulator the RBI.