RBI committee suggests raise in capital amounts for new banks - GulfToday

RBI committee suggests raise in capital amounts for new banks


People walk past a branch of Lakshmi Vilas Bank in Mumbai. Reuters

To ensure that entities seeking private banks licence remained adequately capitalised to meet any eventuality, a Reserve Bank of India (RBI) internal committee has recommended nearly doubling of the initial capital and net worth requirements to be eligible for getting a banking licence.

The committee has recommended path-breaking reforms in the Indian banking sector, calling for participation of large Indian corporates and industrial house as promoters of banks.

The P.K. Mohanty headed working committee had recommended that the minimum initial capital requirement to set up a new universal bank may be increased to Rs1000 crore while that of small finance bank (SFB) may also be raised to Rs300 crore.

Under the on-tap licence being given by the RBI for these categories, the current initial capital requirement for a universal bank is Rs500 crore and that of SFB is Rs200 crore.

The committee has also recommended raising the initial paid up voting equity share capital for unban cooperative banks (UCBs) transiting to SFBs from the present Rs100 crore to Rs150 crore, which it has said has to be increased to Rs300 crore in five years.

“As the licensing guidelines are now on continuing basis (on-tap), the Reserve Bank may put a system to review the initial paid up voting equity share capital/net worth requirement for each category of banks, once in five years,” the committee said in its report that was released by the RBI on Friday evening.

The committee has also recommended listing of SFBs within six years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘ten years from the date of commencement of operations’, whichever is earlier.

It has said that for existing small finance banks and payments banks, listing should be done ‘within six years from the date of reaching net worth of Rs500 crore’ or ‘ten years from the date of commencement of operations’, whichever is earlier.

Universal banks will have to be listed within six years of commencement of operations as is the case now, the committee has said.

LAKSHMI VILAS BANK: India’s Lakshmi Vilas Bank (LVB) is set to be folded into the Indian unit of Singapore’s DBS under a plan proposed by the Reserve Bank of India, which took over LVB on Tuesday due to a “serious deterioration” in its finances.

India’s government said it had also temporarily capped withdrawals from LVB, which has been scouting for a partner since last year amid mounting bad loan and governance issues.

The RBI’s proposed plan would give the Singaporean bank’s expansion ambitions a fillip as it would vastly increase the footprint of DBS in India, where it only has around 30 branches.

Chennai-headquartered LVB, by contrast, has a vast network of more than 550 branches and 900-plus ATMs across India.

“It’s positive for DBS as it will get a ready customer base, branch network with this merger, and this works in their favour as they’ve been looking to expand in India,” Asutosh Mishra, a research analyst at Ashika Stock Broking, said.

Analysts also noted that despite the crippling size of LVB’s non-performing assets, a merger would give DBS a valuable client base.

“DBS will gain a ready customer and deposit base worth Rs210 billion which otherwise would be challenge to build for a foreign bank,” said Mona Khetan, an analyst at Dolat Capital.

In a regulatory filing on Tuesday, DBS said it would pump Rs25 billion ($336 million) into its India unit, if the RBI’s plan is approved. This will be funded from DBS’ existing resources, it added.

The proposal took many by surprise as LVB had been locked in talks with Clix Capital around a potential deal.

Clix, part of a company owned by Mumbai-based private equity firm AION Capital, a partnership between New York-based Apollo Global Management and a unit of India’s ICICI Bank, had submitted a non-binding offer for LVB in June.

However, RBI said on Tuesday that LVB had failed to submit any concrete proposal and it had therefore appointed an administrator and superseded the bank’s board.

DBS Group’s move to take over troubled Lakshmi Vilas Bank will give Southeast Asia’s largest lender the boost in India it has long desired, but aligning the two banks’ business cultures could prove tricky.

LVB, facing mounting bad loans and governance issues and a failure to secure capital, is set to be folded into DBS’s Indian subsidiary under a plan proposed by India’s central bank, which took control of the 94-year old Chennai-based lender on Tuesday, citing a “serious deterioration” in its finances.

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