New Committee to Screen New Bank Licences

• 23 Mar 2021

Why in News

The Reserve Bank of India (RBI) has set up a five-member Standing External Advisory Committee (SEAC), headed by former RBI Deputy Governor Shyamala Gopinath, for evaluating applications for universal banks and Small Finance Banks (SFBs).

• The Standing External Advisory Committee (SEAC) will be comprising eminent persons with experience in banking, financial sector and other relevant areas.

Key Points

• About the Committee:
  
  • Tenure: The committee will have a tenure of three years.
  • Secretariat of the Committee: The secretarial support to the committee would be provided by RBI’s Department of Regulation.
  • Functions: The applications for universal banks and SFBs will first be evaluated by the RBI to ensure prima facie eligibility of the applicants, after which the SEAC will evaluate the applications.
• Small Finance Banks (SFBs):
  
  • Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.
  • They are registered as a public limited company under the Companies Act, 2013.
  • Scope of Activities:
    
    • The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
    • It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own funds, such as the distribution of mutual fund units, insurance products, pension products, etc.
    • The small finance bank can also become an Authorised Dealer in foreign exchange business for its clients’ requirements.
    • There will not be any restriction in the area of operations of SFBs; however, preference will be given to those applicants who, in the initial phase, set up the bank in a cluster of under-banked States/districts, such as in the North-East, East and Central regions of the country.
• Universal Banks:
  
  • Universal Banks are the financial entities like the commercial banks, Financial Institutions, Non-Banking Financial Companies (NBFCs), which undertake multiple financial activities under one roof, thereby creating a financial supermarket.
  • The entities focus on leveraging their large branch network and offer a wide range of services under a single brand name/Bank’s name.
  • According to the guidelines on on-tap licensing of universal banks issued in August 2016, resident individuals and professionals having 10 years of experience in banking and finance at a senior level are eligible to promote universal banks.
    
    • However, large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10%.
    • A non-operative financial holding company (NOFHC) has been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities.
• Related Development:
  
  • Earlier, an internal working group of the RBI in 2020 had proposed an overhaul of licensing policy for private banks and suggested allowing large corporate and industrial houses to float banks in India after suitable amendments to the Banking Regulation Act, 1949.
    
    • However, former RBI Governor Raghuram Rajan has criticised the proposal saying it would lead to “connected lending (a situation in which the bank's controlling owner extends loans of inferior quality at lower interest rates to himself or his connected parties)”.

Non-Operative Financial Holding Company

• Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC.
• As per the Banking Guidelines, promoter or promoter group will be permitted to set up a new bank only through a wholly-owned Non-operative Financial Holding Company (NOFHC).
• Such NOHFC holds the Bank as well as all other financial services companies regulated by RBI or other financial sector regulators based on permissible regulatory prescriptions.

On-tap Licensing of Universal Bank

• An ‘on-tap’ facility means the RBI will accept applications and grant licenses for banks throughout the year.
• The policy allows aspirants to apply for universal bank license at any time, subject to the fulfillment of the set conditions.

Source:IE