Approval for Universal Banks and Small Finance Banks

News: The Reserve Bank of India (RBI) has set up a five-member Standing External Advisory Committee (SEAC), headed by former RBI Deputy Governor Shyamala Gopinath, for evaluating applications for universal banks and Small Finance Banks (SFBs).

  • The Standing External Advisory Committee (SEAC) will be comprising eminent persons with experience in banking, financial sector and other relevant areas.

About the Committee:

  • The committee will have a tenure of three years.
  • The secretarial support to the committee would be provided by RBI’s Department of Regulation.
  • The applications for universal banks and SFBs will first be evaluated by the RBI to ensure prima facie eligibility of the applicants, after which the SEAC will evaluate the applications.

What is Universal banking?

  • It is a system of banking where banks undertake a blanket of financial services like investment banking, commercial banking, development banking, insurance and other financial services including functions of merchant banking, mutual funds, factoring, housing finance, insurance etc.

RBIs universal bank licensing guidelines:

  • Individuals/professionals who are ‘residents’ and have minimum 10 years of experience in banking and finance at a senior level.
  • The initial minimum paid-up voting equity capital for a bank shall be ` five billion. Thereafter, the bank shall have a minimum net worth of ` five billion at all times.
  • The requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or standalone promoting/converting entities who/which do not have other group entities.
  • Not less than 51% of the total paid-up equity capital of the NOFHC shall be owned by the Promoter/Promoter Group. No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC.
  • The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank.
  • The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding of 10 per cent or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.
  • The bank has to open at least 25 per cent of its branches in unbanked rural centres.
  • The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.
  • The board of the bank should have a majority of independent directors.
  • The validity of the in-principle approval issued by the Reserve Bank will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically.

Small Finance Banks (SFBs):

  • Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country. They are registered as a public limited company under the Companies Act, 2013.
  • The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
  • It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own funds, such as the distribution of mutual fund units, insurance products, pension products, etc.
  • The small finance bank can also become an Authorised Dealer in foreign exchange business for its clients’ requirements.
  • There will not be any restriction in the area of operations of SFBs; however, preference will be given to those applicants who, in the initial phase, set up the bank in a cluster of under-banked States/districts, such as in the North-East, East and Central regions of the country.

Non-Operative Financial Holding Company

  • Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC.
  • As per the Banking Guidelines, promoter or promoter group will be permitted to set up a new bank only through a wholly-owned Non-operative Financial Holding Company (NOFHC).
  • Such NOHFC holds the Bank as well as all other financial services companies regulated by RBI or other financial sector regulators based on permissible regulatory prescriptions.

On-tap Licensing of Universal Bank

  • An ‘on-tap’ facility means the RBI will accept applications and grant licenses for banks throughout the year.
  • The policy allows aspirants to apply for universal bank license at any time, subject to the fulfillment of the set conditions.