The RBI is not just a banker’s bank, but also regulates and monitors all banks’ activities and licences. With the introduction of the guidelines for new bank’s licences, it is important to understand why banks need licences from the RBI and what goes behind the scrutinising committee and panels. There have also been many changes in guidelines for private banks that RBI has just introduced. 

What is RBI?

RBI is the Central Bank of India. The full form of RBI is the Reserve Bank of India. This Bank regulates all the money and guidelines around the country. It was founded under British rule in Kolkata. This Bank has been serving since 1935. After two years, The Government shifted this Bank to Mumbai permanently. This central Bank works under the RBI act 1934. The present RBI governor is Shakti Kanta Das, and he is responsible for all the rules and regulations of this organisation. Apart from the governor, there are also another four deputy governors. They are:

  • M.K Jain

  • M.D Patra

  • M Rajeswar Rao

  • T Rabi Shankar

Some Procedures before giving Licence to private banks by RBI

There are certain rules and regulations of RBI for licensing. In this section, we will discuss why a bank will need a licence from the RBI. RBI has amended its guidelines for private sector banks. There are new rules regarding the promoter’s stakes. The pledge rules have been changed under these new guidelines.

  • In a state where the globe is secured with stringent laws and transparency, The banks need to survive this competitive world.

  • Those guidelines are important to understand. They can be considered the fundamental theory in this chapter. Rbi’s guidelines are the most important topic whether you are a finance savvy or a banking aspirant. You might find the whole document from Rbi’s official website.

  • The banking system can be considered the country’s backbone, so it is important to check first if those banks are eligible to survive. Only those banks who earned an unblemished track record get the opportunity to do business.

  •  RBI constructed a high-level committee to scrutinise banks’ history and then consider if it would be witty to issue the Licence to the Bank.

  • To maintain all the transparency, the advisory committee looks into this matter. The committee all the documents.

The Background of RBI’s Guidelines

RBI  has issued licences to almost twelve private banks in the last two decades. In 1993, a total of 10 banks got the licences. After that, Rbi amended some guidelines. In 2010-11, in the budget speech, the finance minister added some banks under RBI’s guidelines.

RBI  formed a group with internal working people on 12th June of 2020. This committee was made to restructure the private banks. This committee gave its recommendations in November. The panel recommended a total of 33 norms for the ownership of private banks. Out of which, RBI accepts only 21 norms.

RBI’s New guidelines for Private Sector Banks

  • In these new guidelines, a bunch of new rules have been added. One of them is that promoters’ stake has increased from 15 to 26%. This norm will be the same for all kinds of promoters. According to Rbi, this norm is for the long run, and if the promoter wishes to lower his stake, he can.
  • A non-promoter can cap his stake between 10-15%. Rbi further clears these norms in this way. According to this organisation,  the non-promoter will cover 10% of the voting equity capital share in the case of natural persons or non-banking institutions. It will be 15% if it belongs to all category financial institutions.
  • Under the Banking Regulation Act 1949, after all the amendments, the large industrialists can be the promoter of the banks. This is because it will strengthen the supervisory mechanism.
  • Under the recommendations, some big announcements are announced for NBFC. An NBFC with an asset size of more than 50,000 crores or above can be converted into banks after ten years.
  • A Payment bank can start its business as a small finance bank if it has experience of 3 years.
  • The initial capital requirements need to be 500 crores to 1000 crores for universal banks. For a small finance bank, it is 200 crore to 300 crores.
  • A small finance bank needs to enlist within eight years from its launching date, while only six years for a universal bank. In the initial five-year lock-in period, the promoters pledge their shares.

Conclusion

RBI’s guidelines for the private sector banks’ Licence are essential for the economic backbone of the country, as it relies on the banking sector. Knowing about the same not only helps in exams but also in personal lives as you understand the economy of the country and its strategies better.