RBI sets holding company rider for bank licence

NEW DELHI: The Reserve Bank of India will allow a promoter or a promoter group to establish new banks if they set up a holding company, which will own the bank and all other financial services companies regulated by the central bank or other financial sector regulators.

The holding company structure is described in the draft guidelines that the central bank has sent to the finance ministry last week. The guidelines are not final but provide a clue to its thinking. The norms governing new banks will be made public once the finance ministry responds.

Such a structure is aimed to ring fence the regulated financial services activities of an industrial house, including the new bank, from other activities such as manufacturing and trading that are not regulated by financial sector regulators.

In his Budget speech, the finance minister had said the Reserve Bank of India would release a set of rules governing new banks before March 31. The rules will come into force only after a public discussion.

A number of conglomerates such as the Tatas, the Aditya Birla Group and Mahindra and Mahindra are keenly awaiting final guidelines, which are likely to be released by the end of this month, as many have shown interest in starting a bank in India. The draft guidelines refer to conglomerates as promoter groups.

The draft guidelines sent to the finance ministry stipulate that companies and promoters considered eligible for banking licence by RBI would have to set a wholly-owned non-operative holding company (NOHC), which needs to be registered as a finance company with RBI, and will be governed by a separate set of prudential guidelines.

But the draft rules say groups that derive 10% of their 'income' from broking or real estate shall not be eligible. This may hit the plans of financial services companies with big brokerage units seeking to enter banking.

NOHC will not be permitted to borrow funds for investing in group companies or "undertake activities which banks are permitted to undertake departmentally". Simply put, it will just be a vehicle to hold investments in all regulated financial sector entities on behalf of the promoter/promoter group for regulatory and prudential comfort.

The central bank has also suggested that the proposed banks will have to maintain arm's length relationship with promoter group entities, their business associates and their suppliers and customers.

"The whole concept behind these draft guidelines is to ensure that systematically important financial institutions, which are granted banking licences, do not endanger the banking institution in the country," said a senior official involved in framing the guidelines.

To ensure this, it has suggested that the exposure of the bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank. All exposures to promoter group entities will have to be approved by the board.

Source: EconomicTimes