How to Start a Bank in India

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The apex banking body of the country, the Reserve Bank of India, had issued the guidelines for licensing new banks on January 22, 1993. They may be mentioned as below:

  • The banks need to provide a minimum paid-up capital of INR 200 crores to start with. Once the bank starts operating the owners will be required to pay an initial capital of 300 crore rupees. The RBI is normally responsible for approving the proposed bank’s total capital structure and this includes the authorized capital.
  • At any time, the promoters of the banks will be required to pay at least 40 percent of the bank’s paid-up capital. Rest of the money can be generated through private placement and public issues. If the promoter has invested more than 40% of the start up capital, they will be permitted to dilute their additional share a year after the bank has started to operate. The promoters’ contribution is normally locked in for five years after the bank receives its license.
  • When the capital gets raised to 300 crores within the 3 year period after starting operations, the promoters will be required to get at least 40% of the additional capital. The remainder can be generated from private placements or public issues. This contribution by the promoters will also be locked in for 5 years after the money is received by the bank.
  • NRIs cannot provide more than 40 percent in the primary equity of a new bank. If an overseas finance or banking organization is operating as a co-promoter or technical collaborator then it will not be allowed to provide more than 20 percent in the aforementioned limit of 40%. This rule is applicable for the multilateral organizations as well. If there is a deficiency in case of the NRIs’ foreign equity contributions then certified multilateral organizations will be allowed to cover that shortfall. The proposed bank will then have to get permission from Exchange Control Department of the RBI and Foreign Investment Promotion Board of the Indian government.
  • Major industrial organizations are not permitted to promote banks but individual companies associated with these business houses, indirectly or directly, will be allowed to invest a maximum of 10 percent. As per rules these companies are not permitted to hold controlling shares in a company. Only the RBI has the right to decide if a company can be regarded as an interconnected entity belonging to a leading business house.
  • The proposed bank is supposed to maintain a significant distance from the business organizations that are part of its promoter group or have invested in the same. The banks are supposed to operate as an independent and unrelated entity and not provide the above mentioned organizations any special credit facilities. The RBI will have the last word when it comes to deciding if a company can be called member of the promoter group of a bank.
  • What is the criteria for changing NBFCs into banks

    The basic criterion for a NBFC (non banking financial company) to become a private sector bank is to have a proper track record. However, there are some other considerations:
    • The company’s minimum net worth should be INR 200 crore. The figure will be increased to 300 crore rupees three years after the company has been transformed to a bank
    • The track record of the company should be absolutely perfect in accordance with the directions and regulations of the RBI. Their record for repaying the public deposits should be absolutely fine. There should be no defaults.
    • The company should not be backed by a major industrial organization or controlled or owned by any public authority such as local, central, and state governments
    • The company’s capital adequacy should be at least 12 percent and its minimum net NPA should be 5%.
    • The minimum latest credit rating of the NBFC should AAA.

    These NBFCs also need to comply with the RBI guidelines in the following areas:

    • Lending to priority sector
    • NRI equity participation
    • Promoters' contribution
    • Foreign equity participation
    • Lock-in period for contributions made by the promoters
    • Relationship with promoters and investors
    • Diluting the promoters' shares once it crosses the minimum specified limit

    Additional Requirements for starting a bank

    To start with, the banks need to have a capital adequacy ratio of at least 10 percent from the time they start operations and this needs to be done on a consistent basis. The following criteria also need to be satisfied in order to make sure the bank operates in a proper playing field:
    • The bank will need to lend at least 40 percent of its net credit to the priority sector
    • It will have to open a fourth of its branches in semi-urban and rural areas to make sure that not all of the branches are concentrated in the urban areas
    Some other important criteria can be mentioned as below:
    • The promoters, the proposed bank, and the group companies will agree to the RBI’s consolidated supervision system
    • The promoters can set up the head offices at any place in India according to their convenience
    • The bank will not be permitted to establish a mutual fund or subsidiary for a minimum of 3 years after it starts operations
    • The bank should use latest infrastructural facilities and equipments such as telecommunications and computers to make sure customers can be provided services in a cost efficient way. It should also have a properly functional Customer Grievances Cell
    • The bank will be administered by Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934. It will also follow statutes, instructions, directives, guidelines, prudential regulations of RBI, and the regulations of SEBI.

    Last Updated on May 15, 2015