RBI rejects applications of 9 out of 12 entities that sought to set up banks

July 5, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

RBI rejects applications of 9 out of 12 entities that sought to set up banks

Subject :Economy

Section: Monetary Policy

In News: RBI has rejected the applications of nine out of 12 entities that applied for a licence to set up a bank under the guidelines for ‘on tap’ licensing of universal banks and small finance banks.

Key Points:

RBI since 2016 has started giving ‘on tap’ banking license for both universal banks (UBs) and small finance banks (SFBs).
After assessment of the applications as per guidelines, applicants were not found suitable for granting of in-principle approval to set up a small finance bank/universal bank.
What is the On Tap licence system?
- On-tap licensing means that the window for getting a bank license from RBI is open throughout the year.
- Earlier, RBI used to invite applications for giving bank licenses, and prospective players submitted their applications within a fixed time-frame as prescribed by RBI.
- The last time RBI granted UB licenses was in 2015 to Bandhan Bank and IDFC Bank.
- It approved Unity SFB in 2021 to rescue the scam-hit Punjab & Maharashtra Cooperative Bank.

What is the difference between UBs and SFBs?

UBs are financial entities like commercial banks, financial institutions, NBFCs, etc. that undertake multiple financial transactions.
Small Finance Banks (SFBs) are focused financial institutions registered as a public limited company providing banking and credit services to unserved & unbanked regions of the country like marginal farmers, MSMEs, and other non-risk sharing financial activities with RBI’s prior approval.
UBs were underscored as a development financial institution (DFI) by the Narsimham committee and the concept of SFBs was laid down in Raghuram Rajan Committee.

What is the selection process for granting a banking license?

In the first stage, the applications are screened by RBI to ensure prima facie eligibility
Post-screening, it is forwarded to the Standing External Advisory Committee (SEAC) constituted of industry experts and eminent persons with experience in the BFSI sector, appointed for three years.
SEAC’s recommendations shall then be examined by the Internal Screening Committee (ISC) consisting of Governor and Deputy Governors.
ISC’s observations shall be forwarded to the Central Board (CB) of RBI that exercises the final discretion to grant in-principle approval for 18 months.
Upon the culmination of this period, RBI shall on satisfaction with compliances grant the regular license for commencement of banking business.

Who can apply for UB, SFB and UCB licenses?

Any individual/entity with at least 10 years of experience in banking and finance at the senior level or private entities with 10 years of successful track record are eligible to apply for on-tap licensing as UBs.
Aspiring entities ought to have assets of Rs. 5000 crore or above.
The required net worth is Rs. 500 crore that has to be maintained at all times
Large industrial houses are restricted to only invest in UBs up to 10% only)

Note: The guidelines vest discretion upon RBI to look for a strong promoter with significant experience and a proven track record. RBI looks at the entity’s track record of customer service, integrity, and efficiency. It implies that RBI would grant the licenses on the basis of discretional prudential factors, in addition to rule-based eligibility criteria.

For an application for SFB, the individual/entity

must have 10 years of experience in the BFSI sector at the senior level. In the case of a corporate entity applicant, it must have at least 5 years of successful track record. Corporate applicants also encompass NBFCs, microfinance institutions, local banks and cooperative banks also. This aids such entities to expand their business on the liability side.
Must have a minimum paid-up voting equity capital or net worth is Rs. 200cr., considering the size of operations and limited scope of activities.
In the case of urban cooperative banks (UCBs) voluntarily transitioning as SFB shall have an initial net worth of Rs. 100 crore only but shall be increased to Rs 200 crores within five years from the commencement of business.