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Banking Licenses and RBI Regulations

Banking Licenses and RBI Regulations. Presentation at Bangalore Branch SIRC | December 29, 2012 CA. Raghav. Why Discuss Bank Licenses?. Bank Licenses lie at the core of reforms with nexus to other arms of the economy

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Banking Licenses and RBI Regulations

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  1. Banking Licenses and RBI Regulations Presentation at Bangalore Branch SIRC | December 29, 2012 CA. Raghav

  2. 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

  3. 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 LokSabha in December 2012 • Developments promise to have a profound implication for practitioners in coming decades

  4. 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 • 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

  5. Indian Financial System

  6. The Indian Banking Journey

  7. Size of the Banking Sector Source: data.worldbank.org

  8. Size of Select Banks Compiled from Internet sources

  9. 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

  10. Draft RBI Guidelines • Other Group Co’s

  11. 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

  12. 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?

  13. 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?

  14. Closing Thoughts Thank You

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