Definition and requirements to be called a Bank

A Bank is a financial institution that, generally, accepts deposits and makes loans. Deposits are money people leave in a banking institution with the understanding that they can get it back at any time or at an agreed-upon future time. A loan is a money let out to a borrower to be generally paid back with interest.

As per Section 5(b) of the Banking Regulation Act of 1949 “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.

In India, we have different types of banks such as scheduled Commercial banks, Local Area Banks, Regional Rural banks, cooperative Banks, Payment Banks, and small finance banks that provide various financial services to individuals, businesses, and governments. Banking services mainly include accepting deposits, lending money, facilitating transactions, and offering various financial products like savings accounts, loans, credit cards, etc. As per the RBI website, currently, there are 12 public sector banks, 21 scheduled private sector banks, 11 scheduled small finance banks, and 4 scheduled payment banks. Also, there are 45 scheduled foreign banks in India and 43 Regional rural banks (RRBs) in India. Also, there are over 1434 Non-Scheduled Urban Cooperative Banks in India (non-scheduled banks those banks which are not included in the second schedule of RBI Act).

To start a banking business requires a licence granted by the Reserve Bank of India based on the following conditions.

Eligible Promoters

In a departure from the earlier guidelines on universal banks dated February 22, 2013, the present guidelines  of RBI include (i) resident individuals and professionals having 10 years of experience in banking and finance as eligible persons to promote universal banks; (ii) large industrial/business houses are excluded as eligible entities but permitted to invest in the banks to the extent of less than 10 per cent; (iii) Non-Operative Financial Holding Company (NOFHC) has now been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities; (iv) The NOFHC is now required to be owned by the promoter/promoter group to the extent of at least 51 per cent of the total paid-up equity capital of the NOFHC, instead being wholly owned by the promoter group; and (v) Existing specialised activities have been permitted to be continued from a separate entity proposed to be held under the NOFHC subject to prior approval from the Reserve Bank and subject to it being ensured that similar activities are not conducted through the bank as well.

(II) ‘Fit and Proper’ criteria:

The promoter/promoting entity/promoter group should have a record of sound financials, credentials, and integrity, and have a minimum of 10 years of successful track record.

 Minimum capital requirement:

The initial minimum paid-up voting equity capital for a bank shall be ₹5 billion. Thereafter, the bank shall have a minimum net worth of ₹5 billion at all times. The promoter/s and the promoter group/NOFHC, as the case may be, shall hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for five years from the date of commencement of business of the bank. The promoter group shareholding shall be brought down to 15 per cent within 12 years from the date of commencement of business of the bank. In case of foreign shareholding in the bank if any should be only after complying above conditions, the aggregate foreign investment limit is restricted to 74 per cent.

Business plan for the bank:

The amount of money available to the bank for providing loans is called its Net Demand and Time Liabilities (NDTL), which is basically, the sum of all the deposits made to the bank by people like you, less the amount that the bank has invested in other banks. NDTL= All liabilities- deposits in other banks. Once the bank starts its operation and starts getting in Deposits (NDTL) (Read (Net Demand and Time Liabilities) [Read full details of calculation of NDTL), a part of it should be stored in an account with the Reserve Bank of India under Section 42(1) of the Reserve Bank of India Act 1934. This is called the Cash Reserve Ratio (read: How to Calculate CRR). Right now, CRR is 4.5% of the NDTL. Under Section 24 and Section 56 of the Banking Regulation Act, 1949, every Scheduled Commercial Banks (Including Regional Rural Banks), Local Area Banks, Small Finance Bank, and Payments Bank in India are required to maintain in the form of cash, or gold or unencumbered investment (“SLR securities”). The present SLR is 18% of NDTL. (Read: How to calculate SLR)

 Corporate governance prudential and exposure norms:

In terms of RBI guidelines on Prudential norms on Income Recognition, Asset Classification, and Provisioning about Advances, banks are required to recognise incipient stress in the borrower accounts and classify them as Special Mention Accounts (SMA) and, if required, subsequently classify them as Non-Performing Assets (Read: Prudential norms for Income Recognition and NPA Classification). In addition, The Basel III Norms have prescribed a Capital Adequacy Ratio (CAR) of 8%. In India, the Reserve Bank of India (RBI) mandates that the CAR for scheduled commercial banks be 9%, and for public sector banks, the CAR to be maintained is 12%. (Read what the capital adequacy ratio is?).

The bank shall comply with the provisions of Banking Regulations Act, 1949, and the existing guidelines on prudential norms as applicable to scheduled commercial banks. The bank is precluded from having any exposure to its promoters. These major shareholders have shareholding to the extent of 10 per cent or more of paid-up equity shares in the bank, the relatives of the promoters and the entities in which they have significant influence or control.

Business plan for the bank:

The business plan submitted by the applicant should be realistic and viable and address how the bank proposes to achieve financial inclusion.

Other conditions:

The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank. The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census). 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. (Source: RBI website)

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