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

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 2

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 3

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 4

Indian Financial System 5

The Indian Banking Journey Bank of Hindusthan, General Bank of India 1770, 1786 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 1809, 1840, 1843, 1921, 1955 Allahabad Bank – First to be run by Indians Small Banks Established Reserve Bank of India, Banking Regulation Act 1935, 1949 First 14, then 6 Commercial Banks Nationalised 1969, New Private Banks allowed to operate, Kotak and Yes Bank allowed to operate 1993,

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

Size of Select Banks Compiled from Internet sources 8

The Banking Laws (Amendments) Bill, 2012 Big Changes Removes Cap on Authorised Capital for Banks (was Rs 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 9

Draft RBI Guidelines Group Holding Co Financial NOHC Banking Company Other Finance Enterprises Other Business Subsidiary (1) Other Business Subsidiary (n) Subsidiary of Subsidiary Other Group Co’s 10

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 11

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? 12

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? 13

THANK YOU Closing Thoughts 14