Entry of Private Sector Banks in India

Entry of Private Sector Banks in India!

On 22nd January, 1993, the Reserve Bank of India had issued the policy guidelines for the entry of new private sector bank in the banking system of the country. The new policy guidelines had opened the door of the banking sector for the participation of the private sector on a large scale.

The first private sector bank which came into operation since the introduction of policy guidelines was the UTI Bank Limited on 2nd April, 1994 with its registered office at Ahmedabad. In this way, 10 such new private sector banks have already been set up in the country.

These new private sector banks have dedicated itself to meet the changing financial needs of the corporate sector. Table 14.4 shows clear picture about these new private sector banks in India.

The entry of these new private sector banks was a part of the medium term strategy to improve the financial and operational health of the Indian banking system. Till September 30, 1995, eight such new banks had become operational and having set up 47 branches they collectively enjoyed a paid up capital of Rs 995 crore and mobilised deposits worth Rs 4,200 crore. 

At the end of November 1995, total initial paid up capital of all the 10 new private banks was Rs 1,152.13 crore.

By virtue of being new, the capital to risk weighted assets ratio of these banks was well over the required eight per cent. So far, the concentration has been more on wholesale corporate banking with attempts to specialise in niche areas like custodial services and corporate advisory services.

It is expected that the entry of new banks and their performance within the prescribed prudential norms and regulations would impart greater structural flexibility to the financial sector.

Thus at present 10 new private sector banks have started functioning, out of the 13 in principle approvals given for setting up of new banks in the private sector. In the 1996-97 budget, an announcement was made that new private local areas, banks, with jurisdiction over three contiguous districts, would be set up.

These banks will help in the mobilisation of rural savings and in channelling them into investments in the local area. The RBI has issued guidelines for setting up such banks. It has already granted in principle approval to two local area private banks, one each in Maharashtra and Karnataka.

The new private sector banks entering the financial sector carry several intrinsic advantages. They were adequately capitalized and did not carry the overhang of the restrictive practices of the past. The backlog of non-performing assets also does not exist and are on a higher footing in terms of technology.

Thus it is expected that new banks would manage their operations based on principles of safety, soundness and prudence.

In recent years, the new private sector banks have shown better performance in its working results. The operating profit of 9 new private sector banks increased by Rs 254 crore in 1997-98, i.e., from Rs 481 crore in 1996-97 to Rs 735 crore in 1997-98 showing an increase of 52.7 per cent over the previous year.

Among all the different types of commercial banks in India, the new private sector banks registered the maximum increase in operating profits. The net profit of the new private sector banks has also increased from Rs 280 crore in 1996-97 to Rs 400 crore in 1997-98.

Total assets of new private sector banks has also increased from Rs 16160 crore in 1996-97 to Rs 25,856 crore in 1997-98 registering an increase of 60.0 per cent over the previous year.

Revised Guidelines for the Entry of New Banks in the Private Sector (January, 2001):

As a part of the major policy initiatives aimed at strengthening the banking system, the Government has issued revised guidelines for the entry of new banks in the private sector. As per the guidelines for licensing of new banks in the private sector issued in January 1993, RBI had granted licenses to 10 banks.

Based on a review of experience gained on the functioning of new private sector banks, revised guidelines were issued in January 2001.

Main provisions/requirements are listed as follows:

1. Initial minimum paid-up capital shall be Rs 200 crore; this will be raised to Rs 300 crore within three years of commencement of business.

2. Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time; their contribution of 40 per cent shall be locked in for 5 years from the date of licensing of the bank and excess stake above 40 per cent shall be diluted after one year of bank’s operations.

3. Initial capital other than promoters’ contribution could be raised through public issue or private placement.

4. While augmenting capital to Rs 300 crore within three years, promoters need to bring in at least 40 per cent of the fresh capital, which will also be locked in for 5 years. The remaining portion of fresh capital could be raised through public issue or private placement.

5. NRI participation in the primary equity of a new bank shall be to the maximum extent of 40 per cent. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter, equity participation shall be limited to 20 per cent within the 40 per cent ceiling.

Shortfall in NRI contribution to foreign equity can be met through contribution by designated multilateral institutions.

6. No huge industrial house can promote a new bank. Individual companies connected with large industrial houses can, however, contribute up to 10 per cent of the equity of a new bank, which will maintain an arms length relationship with companies in the promoter group and the individual companies investing in equity. No credit facilities shall be extended to them.

7. NBFCs with good track record can become banks, subject to specified criteria.

8. A minimum capital adequacy ratio of 10 per cent shall be maintained on a continuous basis from commencement of operations.

9. Priority sector lending target is 40 per cent of net bank credit, as in the case of other domestic banks; it is also necessary to open 25 per cent of the branches in rural/semi-urban areas.