Transcript Banking Licenses and RBI Regulations

Banking Licenses
and RBI Regulations
Presentation at Bangalore Branch SIRC | December 29, 2012
CA. Raghav
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Why Discuss Bank Licenses?
• Bank Licenses lie at the core of reforms with nexus to other
arms of the economy
• There is a positive correlation between size of the banking
system and long term economic growth (Goldsmith 1969, King
and Levine 1993)
• BCG Has predicted that Indian Banking Sector is going to
become the third largest in the world by 2025
• Assets moving from USD 1,350 billion to USD 28,500 Billion
• As important participants in the market economy we need to
know the latest developments
• We are also in a position to form an opinion and influence
decision making
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Why Now
• Recent focus on Financial Inclusion has led to the conclusion
that Existing banks may not be able to meet demands even if
there is some consolidation
• FM made a Budget Announcement Committing to allow new
banks (Feb 2010)
• RBI has issued Discussion paper in 2010 and Draft Guidelines
in 2011 and 2012
• The Banking Laws (Amendments ) Bill passed in Lok Sabha in
December 2012
• Developments promise to have a profound implication for
practitioners in coming decades
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What is Required to be a Bank?
• Governed By Section 22 (1) of Banking Regulation Act, 1949
• “……no company shall carry on banking business in India unless it
holds a licence issued in that behalf by the Reserve Bank and any
such licence may be issued subject of such conditions as the
Reserve Bank may think fit to impose.”
• Section 22(3) further stipulates that RBI must ensure inter alia
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Solvency
Best interest of Depositor and General Public
Monetary Stability and Economic Growth
General Character of the management (Genesis of ‘fit and proper
management’)
• Some Banks regulated by specific acts passed in the
Parliament for their creation
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Indian Financial System
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The Indian Banking Journey
1770, 1786
1809, 1840, 1843,
1921, 1955
1865
• Bank of Hindusthan, General Bank of India
• Bank of Bengal, Bank of Bombay, Bank of Madras (All by East
India Company – Hence ‘Presidency Banks’) – Amalgamated
to form Imperial Bank of India – And then renamed as SBI
• Allahabad Bank – First to be run by Indians1869
1906-1948
• 1100 Small Banks Established
1935, 1949
• Reserve Bank of India, Banking Regulation Act
1969, 1980
• First 14, then 6 Commercial Banks Nationalised
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1993, 2004
• 10 New Private Banks allowed to operate, Kotak and Yes
Bank allowed to operate
Size of the Banking Sector
400
350
300
Domestic Credit % to GDP
India
250
China
Brazil
200
Russian Federation
South Africa
United Kingdom
150
United States
European Union
100
Japan
50
0
Source: data.worldbank.org
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3,000
300
2,500
250
2,000
200
1,500
150
1,000
100
500
50
0
Market Cap n USD Billion
Asset Size in USD Billion
Size of Select Banks
0
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Total Assets (Sept) 2012
Compiled from Internet sources
Market Cap (Jan) 2012
The Banking Laws
(Amendments) Bill, 2012
• Big Changes
• Removes Cap on Authorised Capital for Banks (was Rs. 3000
Crore) and allows them to issue bonus and rights shares
• Ceiling on voting rights in Nationalised banks from 1% to 10%
• Restriction on 10% voting right per shareholder on private banks
removed
• Power already given to RBI to remove any director or officer of a
bank. RBI now allowed to supersede the board of a Bank and to
appoint an administrator for 12 months
• Banking Company mergers exempted from Competition
Commission jurisdiction
• Ownership of 5% or more requires RBI approval
• Depositor Awareness and Education Fund to be set up
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Draft RBI Guidelines
Group
Holding Co
Financial
NOHC
Banking
Company
Other
Business
Subsidiary (1)
Other
Finance
Enterprises
Other Group
Co’s
Other
Business
Subsidiary (n)
Subsidiary of
Subsidiary
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Some Important Features
• Groups with a track record of 10 Years eligible to apply
• Minimum Capital Requirement of Rs. 500 Crore
• NoHC to Own minimum 40% in Banking Co. Any amount in
excess of 40% to be sold off in 2 years
• NoHC holding of 40% to have a lockin of 5 years
• Holding to reduce to 20% in 10 years and 15% in 12 years
• 49% FDI for first 5 years
• 50% board to be Independent director + Separation of
ownership and management
• CBS from day 1
• Listing within 2 years
• 25% branches in unbanked areas
• NBFCs to have option to convert
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Private vs. Public
• What has been the impact of liberalisation
• What is the role of competition
• Role of PSUs in the Crisis
• Do they take less risk or more?
• What is the ability of Government to capitalise PSU banks
regularly
• Is there a demand supply mismatch?
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One Time Window vs. License
on Demand
• Should banks be viewed as perpetual animals ?
• What is the likelihood of a new bank surviving?
• Is Merger to be viewed as a failure?
• Is this problem specific to India?
• Is there a concern on ability to regulate a large number of
Banks?
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Closing Thoughts
THANK YOU
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