Paradigm shift to ‘on tap’ universal bank licences

Its monetary policy statement for 2014-15 on 1 April 2014, the Reserve Bank of India (RBI) announced that it would work on a framework for granting licences “on tap” to universal banks, and for granting of differentiated bank licences with the intent to “to expand the variety and efficiency of players in the banking system while maintaining financial stability”. This statement had been preceded by a policy paper in August 2013, which recommended reviewing the then prevailing policy of granting licences for establishment of banks on a “stop and go” basis, and instead put in place a continuous authorization policy.

The RBI issued a draft framework on 5 May 2016 for public comment on granting licences to universal banks on a continuous basis. The draft framework is based on the feedback received on the policy paper, the RBI’s experience with the granting of licences to IDFC and Bandhan to establish universal banks, and its experience with the granting of differentiated licences to payments banks and small finance banks. Once issued, the framework will replace the 2013 guidelines for licensing of new private sector banks.

The draft framework prescribes the following entities as eligible to apply for a licence to establish a bank: (a) existing non-banking financial companies (NBFCs) that are “controlled” by Indian residents, and that have a successful track record of 10 years; (b) resident individuals that have 10 years’ experience in banking and finance; and (c) private sector entities and groups that are owned and controlled by residents, with total assets of at least ₹50 billion (US$750 million), a successful track record of 10 years, and where the non-financial business income does not account for more than 40% of total assets or gross income.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.