B.Voc.

Sem I
BVB-103
Basics of Banking & Insurance

Unit I: Bank licensing – Constitution

of board of directors and their
rights, Bank Shareholders and their
rights
New RBI guidelines for licensing of
new banks
 Students of B.Voc. Should prepare New Policy of Bank
Licensing. I am sharing you the New Policy of RBI.
 In this PPT, I am also providing you Bank branch opening
policy & its licensing, role of Board of Directors (BoD),
duties of Directors and shareholder for your knowledge.

 Guidelines for licensing of Small Finance Banks in the

Private Sector on Nov.14, 2014
 Granting – in – principle approval for license to applicants
considering ‘on tap’ licensing of these banks.
 In Second Bi-monthly Monetary policy statement 2019 –
20 dated June 06, 2019 that the Reserve Bank would put
draft guideline for ‘on tap’ licensing of such banks.
Guidelines
 Registration, licensing and Regulations:-
 Small finance bank shall be registered as a public
limited company under Company Act, 2013.
 Under Sec. 22 of B.R.Act, 1949 they will be given
license and they must governed by the provisions
of the B. R.Act, RBI Act, 1934, FEMA Act 1999,
Payment and Settlement Act, 2007 Credit
Information Companies(Regulation) Act, 2005,
Deposit Insurance Guarantee Corporations Act,
1981 and other guidelines /Instruction issued by
RBI / SEBI.
Objectives
 Provisions of saving vehicle to unserved and
underserved sections of the population
 Supply of credit to small business units,

small and marginal farmers, micro and

small industries and other unorganised
sector entities through high technology, low
cost operations
 New bank to open at least 25% of their

branches in unbanked rural area instead of

20% branches at earlier.
Eligible Promoters
 Indian citizens, individual, professionals single or
jointly having minimum 10 years experience in
banking sector and finance at a senior level and
company and societies in the private sector that are
are owned by residents & having successful track
record.
 Promoters should run their businesses for at least

a period of 5 years to set up small finance banks.

 NBFCs, MFIs and local area bank in the private sector

that are controlled by residents and having successful

track record for 5 yrs can opt for conversion to
banks.
‘Fit and Proper’ Criteria
 Promoting groups should be ‘fit and proper’ in
aspect eligibility criteria to promote small finance
banks, RBI would assess this criteria & status of the
applications on the basis of their past record of
sound credential & integrity.
 These companies should fulfil the track record
successfully of professional experience of at least
5 years.
 Non-operative Financial Holding Company (NOFHC)
would have the option of setting up converting into
a banking company under the Company Act, 2013.
Structure and Activities
 NOFHC must be registered with RBI as a non- banking
financial company (NBFC)
 Not less than 51% of the total paid-up equity capital of the
NOFHC shall be owned by the promoter or promoting group.
 NOFHC shall hold the bank as well as all the other financial
services entities of the group regulated by RBI or other
financial regulators
 It is mandatory to adopt Sec. 6(a) to Sec. 6(o) of BR
Act, 1949 by these entities.
 They should do certain specialised activities such as
insurance, mutual funds, stock broking, infrastructure debt
fund etc
 There are certain other activities such as credit card, debit
card, ATM, primary dealers, leasing, hire purchase factoring
etc.
 The initial minimum paid – up voting equity capital for a bank
shall be Rs. 500 crores. The banks shall have a minimum net
worth of Rs. Five billion at all times.
 In case of conversion of NBFCs into banks, the converting
entity and thereafter banks shall have a minimum net
worth of Rs. 5 billion at all the times.
 The bank shall be required to maintain a minimum capital
adequacy ratio of 13% of its risk weighted assets (RWA) for a
Minimum period of 3 years after commencement of its
operations.
The bank shall get its shares listed on the stock exchange within 6
years of the commencement of business by the bank.
The directors of a banking company shall not hold office for more

than eight years continuously . However, this provision is not

applicable to the Chairman or a whole time director.
In case of removal of the Chairman or a whole time director,

he/she ceases to be a director of the bank and shall not be eligible

for further appointment as director for a period of 4 years.
Sec 11 of BR Act specifies the minimum capital and reserves

requirement of banking company, the RBI

 can stipulate a higher requirement of capital for
licensing banking company as under Sec. 22, the
RBI has to be satisfied that the company has an
adequate capital structure and earning prospects.
Cancellation of Licence:
 Sub –Section (4) of Sec. 22 of the B.R.Act authorises
the Reserve Bank to cancel the licence granted to any
banking company.
 The company ceases to carry on banking business in
India.
 Banks did not sent mandatory returns to RBI in time.
 The banking company at any time fails to comply with
any of the conditions imposed under the Sub-
Section (1) of Sec. 22 of BR Act.
 The banking company does not fulfil at any time, any
of the conditions referred to in the Sub – Sec.
(3) or 3(A) of Sec. 22 of BR Act.
 Before cancellation of licence for non-compliance with
any of the conditions as above, the company has to be
given an opportunity for necessary steps for
compliance. In case of cancellation of licence, banking
company can appeal to Central Govt. with in 30 days.
Bank Branch Licensing
 Any bank wants to carry banking business in a
new place of business or changing location of
the existing place of business should take prior
permission of RBI.
 Section 23 of the BR Act, place of business for
this purpose includes sub-office, pay office, sub
– pay office or any place at which deposits are
received, cheque, cash or money lent.
 Changing the location of an existing place of
business within the same city, town or village
would not need permission from RBI.
Certain qualifications specified for director of banking companies
under Sec. 10A of B R Act at least fifty one percent of the total
number of directors.
They must specialised in the field of rural economy, agriculture,
accountancy, banking
cooperation, economics, finance, law, small scale industries
and other special and practical knowledge which is useful to the
banking co.
Period of Office of Directors:
 Shall not hold office more than 8 years continuously.This criteria

is not applicable to the Chairman or a whole-time director.

In case of Chairman or whole – time director of bank is removed

from the office, he/she ceases to be a director of the bank and

shall not be eligible for further appointment as director of that
banking company for a period of four years.
Reconstruction of Board
 Board of the banking company should be
reconstituted in accordance with the requirements
of Sec. 10A BRAct.
 Any director has to be retired for such a
reconstitution, this may be done by lots, in the
prescribed manner and it shall be binding on every
director of the board.
 Board of the Directors should be fulfilled all
requirement as per the guidelines of RBI, otherwise
bank to reconstitute the board. In such case Board
should be given the opportunity to place their
position. Within 2 months banks should fulfil the
order of RBI, otherwise the Bank may remove any
director & such person should cease to hold office.
 RBI is empowered to reconstitute the board, if the board is
not properly constituted.
 Every banking company should have a full – time Chairman or
a full – time MD, if there is no full-time chairman with
specified qualification.
 The Reserved Bank has powers to remove the Chairman and
appoint a suitable person in his placed in certain cases.
 Sec. 20 of BR Act, 1949 prohibits loans and advances to
directors or to any firm or company in which directors are
interested. Disclosure of interest by director is mandatory.
 In case of RBI is inspecting a particular bank, director or
officer or employees is under an obligation to produce all the
books, accounts,& documents in his custody and furnish it.
In case of RBI is inspecting a particular bank
Opening of temporary bank branch
Opening of a temporary places of business up to one month for
purpose of affording banking facilities for any exhibition, conference
or any type of temporary occasion need not take permission.
These restrictions also apply to foreign branches of banking

companies incorporated in India.

According to new guideline of RBI, Banks should submit their request

for new branches, administrative office, ATMs once in a year for

consideration of RBI.
There is no need to submit individual applications for each & every

branch.
Permission would be valid for a period of one year.
Criteria for granting permission
 Sec. 23, BR Act, 1949 there are a few require-
ments for satisfaction of the guidelines of RBI:
 Financial condition and history of the bank

 Adequacy of capital structure and earning

prospects
 General character of its management

 Public interest

 Inspection by RBI under Sec. 35 is essential

 RBI can impose any condition which it think fit.

Duties of directors of banking
company
 Shareholders are the main stakeholders and bank’s
main stakeholders are the depositors.
 The depositor’s risk appetite is significant less
compared to that of its shareholders &
management.
• Board of Directors (BoD) should be expertise,
knowledge and priorities.
• They need to act as a cohesive whole for the
betterment of the bank they are serving.
• They should not be focussing on the individuals or
the groups they represent.
 Board members should act as a bride between
shareholders, customers and management.
 Director should protect the interest of the depositors.
 Independent director need to equip themselves by
increasing their knowledge levels in general and also
the bank.
 Bank is an important players both as a participants in
the P&S Systems and as a counterparty to other banks
and non-banking company
 A crisis in the bank spreads most faster within the
system than a crisis in any other corporate.
 Banks are responsible for the flow of credit in
the financial system.
 Directors has the role for strategies, long –

term objectives and the alternative way of

solving the objectives with the management.
 And guiding the management in the final

decision on these issues.

 Regarding submission of different returns

to RBI, directors are responsible.

 For risk management defence are specially three:- Staff, the
risk owners ( i.e. mid-office for trading, internal control for
frauds)
 Reviewing and guiding corporate strategy, risk policy, annual
budget and business plan, setting performance objectives,
monitoring & corporate governance.
• Directors are responsible for signing of the balance sheet and
profit and loss statement.
• Director should not take loans and advances, if they have any
interest in that particular bank. (Sec. 20 of B.R.Act, 1949.
• It is important to mention here the collapse of a single bank
can cause significant problems to its borrowers.
Thus BoD should play an active role in providing over-
sight of the way in which senior management approaches
different kinds of risks which bank face, such as credit,
market liquidity and operational. *********
Duties of Shareholders of banks
 Voting rights of shareholders – There is no ceiling on
a person’s holding of shares in a banking company
under the Banking Regulation Act or any other law.
 Sec. 12(2) of the Act puts certain restrictions on
voting rights of shareholders.
 No shareholders can exercise voting rights in respect
of the shares held by him/her in excess of 10% of
the total voting rights of all the shareholders of the
banking company.
 This provision does not in any way affect the transfer
of shares or the registration of such transfer. It only
puts a limit on voting rights.
 According to RBI, if banking companies receive more than
the specified percentage of their share for transfer to one
party, the Bank’s board must refer the case to RBI.
 Bank shall not transfer the share without receiving Reserve
Bank’s acknowledgement. This is with a view to ensure
that the controlling interest in a banking co. does not
change hands without the knowledge and approval of
Reserve Bank.
 Declaring the dividend, is the one of the duties of BoD.
 Approval of the financial statement.
 A shareholder does not manage the day to day business of
the company as this is handled by the Board of the
Directors.
 Board of Directors should convene a meeting before
declaring dividend.
 There are certain restrictions on the payment of
dividend to the shareholders of banking co.
 Sec 15 of B. R.Act, 1949; no dividend is payable until all
capitalised expenses are completely written off.
 Directors should send different kind of returns to RBI
with in stipulated time.
 Directors should maintain the particulars of
shareholders and other office bearers of banking
co. and furnish the report to RBI.
****
 At a Glance
Licensing of New Banks in the Private Sector
Key features of the guidelines are:
(i) Eligible Promoters: Entities / groups in the private sector,

entities in public sector and Non-Banking Financial Companies

(NBFCs) shall be eligible to set up a bank through a wholly-owned
Non-Operative Financial Holding Company (NOFHC).
(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past

record of sound credentials and integrity, be financially sound with

a successful track record of 10 years. For this purpose, RBI may
seek feedback from other regulators and enforcement and
investigative agencies.
(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly

owned by the Promoter / Promoter Group. The NOFHC shall hold

the bank as well as all the other financial services entities of the
group.
 (iv) Minimum voting equity capital requirements for banks and
shareholding by NOFHC: The initial minimum paid-up voting equity
capital for a bank shall be `5 billion. The NOFHC shall initially hold
a minimum of 40 per cent of the paid-up voting equity capital of
the bank which shall be locked in for a period of five years and
which shall be brought down to 15 per cent within 12 years. The
bank shall get its shares listed on the stock exchanges within three
years of the commencement of business by the bank.
 (v) Regulatory framework: The bank will be governed by the
provisions of the relevant Acts, relevant Statutes and the Directives,
Prudential regulations and other Guidelines/Instructions issued by
RBI and other regulators. The NOFHC shall be registered as a non-
banking finance company (NBFC) with the RBI and will be governed
by a separate set of directions issued by RBI.
 (vi) Foreign shareholding in the bank: The aggregate
non-resident shareholding in the new bank shall not
exceed 49% for the first 5 years after which it will be as
per the extant policy.
 (vii) Corporate governance of NOFHC: At least 50% of the
Directors of the NOFHC should be independent directors.
The corporate structure should not impede effective
supervision of the bank and the NOFHC on a
consolidated basis by RBI.
 (viii) Prudential norms for the NOFHC: The prudential
norms will be applied to NOFHC both on stand-alone as
well as on a consolidated basis and the norms would be
on similar lines as that of the bank.
(ix) Exposure norms: The NOFHC and the bank shall not
have any exposure to the Promoter Group. The bank shall
not invest in the equity / debt capital instruments of any
financial entities held by the NOFHC.
(x) Business Plan for the bank: The business plan should

be realistic and viable and should address how the bank

proposes to achieve financial inclusion.
(xi) Other conditions for the bank :
The Board of the bank should have a majority of

independent Directors.
The bank shall open at least 25 per cent of its branches in

unbanked rural centres (population upto 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 banks.
 Banks promoted by groups having 40 per cent or more
assets/income from non-financial business will require RBI’s
prior approval for raising paid-up voting equity capital
beyond `10 billion for every block of `5 billion.
 Any non-compliance of terms and conditions will attract
penal measures including cancellation of licence of the bank.
 (xii) Additional conditions for NBFCs promoting / converting
into a bank : Existing NBFCs, if considered eligible, may be
permitted to promote a new bank or convert themselves into
banks.
 New bank should also achieve priority sector
lending target of 40%.
 FDI is capped at 49% for first five year, later as per
extant norms.
 Procedure for application:
 In terms of Rule 11 of the Banking Regulation
(Companies) Rules, 1949, applications shall be
submitted in the prescribed form (Form III). The
eligible promoters can send their applications for
setting up of new banks along with other details
mentioned in Annex II to the Guidelines to the
Chief General Manger-in-Charge, Department of
Banking Supervision, Reserve Bank of India,
Mumbai.
 Procedure for RBI decisions:
 At the first stage, the applications will be screened by the
Reserve Bank. Thereafter, the applications will be referred to
a High Level Advisory Committee.
 The Committee will submit its recommendations to the
Reserve Bank. The decision to issue an in-principle approval
for setting up of a bank will be taken by the Reserve Bank.
 The validity of the in-principle approval issued by the Reserve
Bank will be one year.
 In order to ensure transparency, the names of the applicants
will be placed on the Reserve Bank website after the last date
of receipt of applications.
 In July 2013, RBI invited applications for new banking licenses
but only 25 aspirants applied. These applications were
scrutinized by the Bimal Jalan panel.
 In April 2014, RBI issued in principle license to only 2
applicants viz. Infrastructure Development Finance Company
(IDFC) and microfinance lender Bandhan Financial Services Ltd.
This was mainly because of the debate over the question that
whether corporate houses and entities with exposure to real
estate should be given licenses (or not).
 The in-principle approval by RBI is valid for ONLY 18 months.
During this 18 month-period IDFC and Bandhan Financial
Services Ltd will have to meet all RBI rules and guidelines in
order to secure a permanent licence to start banking
activities.