Understanding Universal Banking Licences in India
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February 05, 2025
A Universal Banking Licence permits a financial institution to offer a wide array of banking services, including commercial and investment banking, under a single umbrella. This model aims to provide comprehensive financial solutions to customers, enhancing convenience and operational efficiency.
The Reserve Bank of India's 'On Tap' Licensing Guidelines
In August 2016, the Reserve Bank of India (RBI) introduced the 'on tap' licensing policy for universal banks in the private sector. This policy allows eligible entities to apply for a banking licence at any time, promoting a more dynamic and competitive banking environment. Key aspects of these guidelines include:
1. Eligibility Criteria
- Individuals/Professionals: Resident individuals with at least 10 years of experience in banking and finance at a senior level are eligible to promote universal banks.
- Entities/Groups: Private sector entities owned and controlled by residents, with a successful track record of at least 10 years, are eligible. However, large industrial houses are excluded but may hold up to a 10% stake in such banks.
- Non-Banking Financial Companies (NBFCs): NBFCs controlled by residents and with a successful track record of at least 10 years can apply, provided they meet certain criteria.
- Conversion of Small Finance Banks: According to RBI norms, to be eligible for conversion into a universal bank, these banks must:
- Have a minimum net worth of ₹1,000 crore.
- Hold scheduled status.
- Have a satisfactory track record of at least five years.
- Maintain a gross non-performing asset (NPA) ratio of 3% or less and a net NPA ratio of 1% or less over the past two financial years.
- Be listed on stock exchanges.
2. Corporate Structure
- The requirement to establish a Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or standalone entities without other group entities.
- For promoters with other group entities, setting up the bank through an NOFHC is mandatory, with at least 51% of the total paid-up equity capital of the NOFHC owned by the promoter/promoter group.
3. Capital Requirements
- The initial minimum paid-up voting equity capital for a bank is set at Rs 5 billion.
- Promoters must hold a minimum of 40% of the paid-up voting equity capital, locked in for five years from the commencement of business.
- This shareholding should be reduced to 15% within 15 years.
4. Foreign Shareholding
- Foreign shareholding is permitted as per the existing Foreign Direct Investment (FDI) policy, with an aggregate limit of 74%, subject to the minimum promoter shareholding requirements.
5. Corporate Governance
- The bank's board should have a majority of independent directors.
- The bank must comply with the Banking Regulations Act, 1949, and existing prudential norms applicable to scheduled commercial banks.
6. Financial Inclusion
- Applicants must submit a viable business plan addressing how the bank proposes to achieve financial inclusion.
- At least 25% of the bank's branches should be located in unbanked rural centers.
7. Listing Requirements
- The bank is required to list its shares on stock exchanges within six years of commencing business.
These guidelines aim to foster a robust and inclusive banking sector in India by encouraging the establishment of new universal banks with sound governance and a focus on financial inclusion.
Final Thoughts
The RBI's 'on tap' licensing policy represents a significant step toward enhancing the dynamism and inclusivity of India's banking sector. By setting clear eligibility criteria and emphasizing financial inclusion, the RBI aims to encourage the establishment of universal banks that can cater to diverse customer needs while maintaining financial stability.
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