Money & Banking

Finance Ministry for giving bank licences to corporates

Our Bureau New Delhi | Updated on November 12, 2017 Published on August 16, 2011

The Finance Ministry has sent its views to the RBI on granting new banking licences on August 12.

It is believed to be in favour of granting new banking licences to industrial houses, provided the bank is a completely separate entity.

In the communication, the Ministry has apparently suggested to RBI to soften its stand on FDI. The RBI in its discussion paper had suggested below 50 per cent aggregate non-resident investment. According to sources, the Ministry would prefer the promoters' contribution to be initially at least 40 per cent, which can be brought down after seven years. The RBI had suggested something similar, except with a five-year lock-in period, and another five years before dilution of stake.

The RBI is likely to come up with its final guidelines for public comments soon.

Last year, the RBI had released a discussion paper on ‘Entry of New Banks in the Private Sector'. This paper evoked discussion on mainly six issues – minimum capital requirements and promoters' contribution, FDI limit, permission for industrial houses to promote banks, permission to NBFCs to convert itself into banks, and the business model.

In the discussion paper, the RBI had suggested that promoters' shareholding should initially be minimum 40 per cent with a five-year lock-in period. After another five years, the promoters would have to dilute their stake in a time bound manner.

It also suggested the threshold for other significant shareholders to be restricted to a maximum of 10 per cent with a requirement to seek RBI nod on reaching five per cent threshold and above

The existing norms allow the promoters to bring in minimum of 40 per cent of the paid-up capital at the time of licensing. There is also a lock-in period of five years.

In terms of foreign capital, the discussion paper had said that aggregate non-resident investment, including FDI, NRI and FII in these new banks could be capped at a suitable level below 50 per cent. The discussion paper also advised foreign investment should have a lock-in for the initial 10 years.

At present, the aggregate foreign investment from all sources (FDI, FII, NRI) in private sector banks should not exceed 74 per cent of the paid-up capital of the bank.

Further, the FDI policy prescribes that at all times, at least 26 per cent of the paid-up capital of private sector banks will have to be held by residents, except for wholly-owned subsidiary of a foreign bank.

Though the discussion paper had made a case for allowing industrial houses to get banking licences, there was believed to be some opposition to it. Some feared that industrial houses might divert funds from the banks they promoted.

Now, with the likely provision of entirely separate entity for banking operations, this fear has been addressed.


Published on August 16, 2011
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