RBI against securitisation for profit booking

India's central bank Wednesday proposed higher capital requirements and capping the foreign holding below 50% in new private-sector banks as it considers issuing fresh banking licenses.

"A larger number of banks would foster greater competition, and thereby reduce costs, and improve the quality of service," the Reserve Bank of India said in a discussion paper.

India's banking sector is dominated by 27 state-run banks, and the RBI has historically been wary of granting licenses to the private sector due to apprehensions it may become difficult to control any rise in bad loans. The last domestic banking license was allotted to Yes Bank Ltd. in May 2004. India now has 22 private-sector banks.

The discussion paper comes about six months after Finance Minister Pranab Mukherjee, in his budget speech in February, said there was a need to expand the banking system and that the RBI was considering issuing new bank licenses.

The discussion paper proposes three different options for the minimum capital requirement for new banks with their pros and cons. The first one argues for a capital base above 3 billion rupees ($64.5 million), while the second is for a steeper 10 billion rupees. The third option is to have an initial minimum capital of 5 billion rupees, which can be increased to 10 billion rupees in five years.

"Taking into account the lapse of time since the last guidelines issued in January 2001 and inflation since then, there is a case to have the minimum capital requirement at more than 3 billion rupees," it said, seeking feedback on the discussion paper by Sept. 30.

The 2001 rules had specified the minimum capital at 2 billion rupees, which was to be raised to 3 billion rupees within three years of starting business.

The RBI said also that the total foreign shareholding through direct and institutional investments may be capped below 50% with a lock-in period of 10 years.

The paper proposes multiple options for minimum shareholding. That includes retaining the existing rule of founders initially bringing in at least 40% of capital with a lock-in clause of five years while the maximum stake of other shareholders capped at 10%.

The paper discusses allowing industrial and business houses to enter into the banking sector. It said that firms which have experience in financial services may be considered for such licenses. Another option may be allowing corporations to take over regional rural banks before being issued a bank license, it said.

Non-banking finance companies can also be given an option of converting to banks, but they must not be involved in real-estate activities, it said.

Financial services firms such as Bajaj Finserv Ltd. and IFCI Ltd., which may look at converting to bank, welcomed the move.

"Our net worth today is above 30 billion rupees. So there is every possibility of us meeting the capital adequacy criteria," IFCI Chief Executive Atul Kumar Rai told the ET Now television channel.