Issuing licenses to an applicant bank is at the discretion of RBI. Before a license is issued RBI satisfies itself regarding the “Tests of entry” namely:
- Information about background, credentials of promoters
- Funding aspects of capital
- Sources of such funds
- Background of key supporting professionals
- Geographical coverage of the proposed bank
- Business and economic activity to be financed
- Profitability aspects
- Public interest
RBI may also scrutinize the books of accounts of the applicant company and also gather market information to satisfy itself about the advisability of granting a license.
At the time of commencement of Banking Regulation Act, 1949 existing banks at that juncture were required to apply for a license within six months. They were allowed to continue till their application was rejected. One of the objectives behind licensing was to discourage banks which were operating not on sound lines and also indiscriminate formation of banks.
Section 11(2) and Section 11(3) of Banking Regulation Act, 1949 specifies a minimum capital and reserves for a foreign bank, local banks operating in more than one state and in one state. RBI has powers to specify a higher amount of paid up capital for the purpose of licensing.
Refusal of License by RBI
The granting of license or refusal of RBI, if based on relevant material and germane consideration, cannot be challenged in a court of law. In the matter of Shivabhai Zaverbhai Patel vs. RBI AIR 1986 Guj. 19; (1985) 1 GLR 257, Hon’ble High Court of Gujarat upheld the RBI’s decision of rejection of application for a banking license which was based on diligent study and material facts.
Licensing of Foreign Banks in India
Foreign banks wishing to open a branch in India require a license under the Banking Regulation Act, 1949. India issues a single class of banking license unlike some other countries. No undue restrictions are placed on them on their operations. In some countries there is a requirement of multiple licenses for dealing in local currency and foreign currencies with different categories if clientele. Like domestic banks, foreign banks enjoy similar facilities to the payments and settlement systems and they are admitted as full members of clearing houses and payments system.
Procedurally, foreign banks are required to apply to RBI for opening their branches in India. Foreign banks’ application for opening their maiden branch is considered under the provisions of Section 22 of the Banking Regulation Act,1949. Before granting any license under this section, RBI may require to be satisfied that the Government or the law of the country in which it is incorporated does not discriminate in any way against banks from India. Other conditions as enumerated in Section 2(5) of the Banking Regulation Act, 1949 are also required to be fulfilled.
Unlike the restrictive practices of certain foreign countries, India in respect of the licensing and operation of the foreign bank branches as illustrated by the following:
- India issues a single class of banking license to foreign banks and does not place any limitations on their operations. All banks can carry on both retail and wholesale banking.
- Deposit insurance cover is uniformly available to all foreign banks operating in India at a non-discriminatory rate of premium.
- The norms for capital adequacy, income recognition and asset classification are by and large the same. Other procedural norms such as exposure limits are the same as those applicable to Indian banks.
Licensing of private sector banks in India
Prior to 1993 licensing of Private Sector banks were done in a routine way under Section 22 of the Banking Regulation Act, 1949. In the year 1993 the RBI has announced a new set of guidelines as a part of economic liberalization in that year and a few in the subsequent years. In 2001 the RBI had revised the guidelines for licensing Private Sector banks in India and two or more banks namely Kotak Bank and Yes Bank were issued licenses. The policy was known as ‘Stop and Go.’ In February 2013, a need was felt for reviewing of the licensing of banks under ‘Stop and Go’ in view of emerging scenarios in International banking and Indian banking, and also in the light of recommendations of Raghuram G. Ranjan Committee and other points of view, RBI decided to have an explicit policy on banking structure. After due deliberations, existing ‘Stop and Go’ licensing policy was reviewed and in its place a ‘continuous authorization [or on tap]’ policy was announced with effect from August 1, 2016, with a view to increase the level of competition and bring new ideas into the system.
The salient features of continuous authorization policy
(a) Individuals/ professionals who are ‘residents’ or (‘residents’ as per FEMA definition) with 10 years of experience in banking and finance at a senior level would be eligible to promote banks, singly or jointly.
(b) Entities/ groups in the private sector which are ‘owned and controlled by ‘residents’ [as per FEMA definition], having a successful track record for at least 10 years, with total assets of Rs. 50 billion or more, where in non-financial business of the group does not exceed 40% or more in terms of total assets/ in terms of gross income are also eligible to promote banks.
(c) Existing Non- Banking Financial Companies (NBFCs), that are ‘controlled by residents’ [as per FEMA definition], with a successful track record for at least 10 years will be eligible to convert into a bank or promote a new bank.
[Note: Any NBFC, which is a part of the group that has total assets of Rs. 50 billion or more and that the non-financial business of the group accounts for 40 per cent or more in terms of total assets/ in terms of gross income, is not eligible].
(d) ‘Fit and Proper’ criteria: The RBI assess the promoters under the following parameters to decide whether such promoters are’ fit and proper’ for promoting banks.
(i) Where promoters are individuals: Each of the promoters should have a minimum 10 years of experience in banking and finance at a senior level. The Promoters should have a past record of sound credentials and integrity. The Promoters should be financially sound and should have a successful track record for at least 10 years.
(ii) Where promoters are entities/ NBFCs: The promoting entity/ promoter group should have a minimum 10 years of experience in running its/ their businesses. The promoting entity and the promoter group should have a past record of sound credentials and integrity. The promoting entity and the promoter group should be financially sound and should have a successful track record for at least 10 years. Preference will be given to promoting entities having diversified shareholding.