Procedure of establishing a new bank

Student’s Signature: _ Rohan Kumar Sinha _

Acknowledgement

The satisfaction and delight that accompanies the completion of any task would be incomplete
without mentioning the people who made it possible with their constant guidance and
encouragement which put the finishing touch to all the efforts with success.

I Rohan Kumar Sinha extend my intense gratitude and respect to Mr. Sumit, (my course
instructor) for providing a learning platform. I express my deep sense of gratitude and sincere
thanks to him for valuable guidance.

I would like to thanks my seniors, who helped me thoroughly for shaping out things well in
order.

Rohan Kumar Sinha

Page 1 of 23
 Content
1. Introduction of Banking Sector 4

2. Statutory Background 4

3. Policy of Issuing Licence to Banks in India 6

4. Differentiated Bank Licence- Examine Pros & Cons 9

5. Why New Bank in India 10

6. Guidelines on entry of new banks in the private sector 11

7. Conclusion 15

8. Annexure 16

9. Bibliography 24

Page 2 of 23
I. Introduction to Banking Sector
Financial sector reforms have been introduced in a calibrated and well-sequenced manner
since the early 1990s and have resulted in a competitive, healthy and resilient financial
system. There has been financial deepening: the deposits/ GDP ratio rose from 16.4 per cent
in 1971-75 to 36.1 per cent in 1989-90 and further to 60 per cent in 2004- 05. Bank credit to
commercial sector increased from 15.6 per cent to 30.3 per cent of GDP in 1989-90 and 48
per cent in 2005-06.
The Annual Policy Statement for the year 2007-08 by Governor, Reserve Bank of India at
Para 185 states that “with a view to directing the resources of banks to their niche areas and to
sustain efficiency in the banking system, a graded approach of licensing may be appropriate
which can be equally applicable to both domestic and foreign banks. A technical paper on this
subject will be placed on website inviting comments/suggestions from the public”.
Accordingly, an internal study in RBI covered the background on banking regulation,
licensing of banks under Banking Regulation Act, 1949, extant policy relating to bank
licensing, both Indian and foreign banks international experience and practice on limited bank
licensing.

II. Statutory background

Banking Regulation Act, 1949

2.1 Background
Prior to the enactment of Banking Regulation Act, 1949 which aims to consolidate the law
relating to banking and to provide for the nature of transactions which can be carried on by
banks in India, the provisions of law relating to banking companies formed a part of the
general law applicable to companies and were contained in Part XA of the Indian Companies
Act, 1913. These provisions were first introduced in 1936, and underwent two subsequent
modifications, which proved inadequate and difficult to administer.

Moreover, it was recognised that while the primary objective of company law is to safeguard
the interests of the share holder, that of banking legislation should be the protection of the
interests of the depositor. It was therefore felt that a separate legislation was necessary for
regulation of banking in India. With this objective in view, a Bill to amend the law relating to
Banking Companies was introduced in the Legislative Assembly in November, 1944 and was
passed on 10th March, 1949 as the Banking Companies Act, 1949. By Section 11 of the
Banking Laws (Application to Cooperative Societies) Act, 1965, the nomenclature was
changed to the Banking Regulation Act, 1949.

2.2 Indian banking system

The Indian financial system currently consists of commercial banks, co-operative banks,
financial institutions and non-banking financial companies (NBFCs). The commercial banks
Page 3 of 23
can be divided into categories depending on the ownership pattern, viz. Public sector banks,
private sector banks, foreign banks. While the State bank of India and its associates,
nationalised banks and Regional Rural Banks are constituted under respective enactments of
the Parliament, the private sector banks are banking companies as defined in the Banking
Regulation Act. The cooperative credit institutions are broadly classified into urban credit
cooperatives and rural credit cooperatives.

2.3 Powers and responsibilities of RBI in respect of regulation of banks

The Reserve Bank of India has been entrusted with the responsibility under the Banking
Regulation Act, 1949 to regulate and supervise banks' activities in India and their branches
abroad. While the regulatory provisions of this Act prescribe the policy framework to be
followed by banks, the supervisory framework provides the mechanism to ensure banks'
compliance with the policy prescription.

2.4 General Framework of Regulation

The existing regulatory framework under the Banking Regulations Act 1949 can be
categorised as follows:
A. Business of Banking Companies
B. Licensing of banking companies
C. Control over Management
D. Acquisition of the Undertakings of banking companies in certain cases
E. Restructuring and Resolution including winding up operation
F. Penal Provisions

2.5 Licensing of banks

In terms of Sec 22 of the B.R.Act, no company shall carry on banking business in India,
unless it holds a licence issued in that behalf by Reserve Bank and any such licence may be
issued subject to such conditions as the Reserve Bank may think fit to impose. Before
granting any licence, RBI may require being satisfied that the following conditions are
fulfilled:

1. That the company is or will be in a position to pay its present or future depositors in
full as their claims accrue;
2. That the affairs of the company are not being , or are not likely to be, conducted in a
manner detrimental to the interests of its present or future depositors;
3. That the general character of the proposed management of the proposed bank will not
be prejudicial to the public interest or the interest of its depositors;
4. That the company has adequate capital structure and earning prospects;
5. That having regard to the banking facilities available in the proposed principal area of
operations of the company, the potential scope for expansion of banks already in
existence in the area and other relevant factors the grant of the licence would not be
prejudicial to the operation and consolidation of the banking system consistent with
monetary stability and economic growth.

Page 4 of 23
2.6 Business of banking
As per Section 5 (b) of Banking Regulation Act, 1949 “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand
or otherwise and withdrawable by cheque, draft, and order or otherwise.

2.7 Permissible Activities of Banking Company

Section 6 of B.R. Act, 1949 gives the details of forms of business in which a banking
company may engage. However, it is a long list and banks may carry out one or more
activities permitted in the section.

III. Policy of issuing licence to banks in India

The policy framework for issuing licences to private sector and foreign banks are discussed
below:

3.1 Private sector banks

The guidelines for licensing of new banks in the private sector were issued by the Reserve
Bank of India (RBI) on January 22, 1993. The revised guidelines for entry of new banks in
private sector were issued on January 3, 2001. The foreign investment limit from all the
sources in private banks was raised from a maximum of 49 per cent to 74 per cent in March
2004. In consultation with the Government of India, the Reserve Bank released a roadmap on
February 28, 2005, detailing the norms for the presence of foreign banks in India. The
Reserve Bank also issued comprehensive guidelines on Ownership and Governance in private
sector banks. The broad principles underlying the policy framework were to ensure that the
ultimate ownership and control of private sector banks is well diversified. Further, the fit and
proper criteria have to be the over-riding consideration in the path of ensuring adequate
investments, appropriate restructuring and consolidation in the banking sector. No single
entity or group of related entities would have shareholding or control, directly or indirectly, in
any bank in excess of 10 per cent of the paid up capital of the private sector bank. Any higher
level of acquisition will be with the prior approval of RBI and in accordance with guidelines
issued by RBI for grant of acknowledgement for acquisition of shares. These measures were
intended to further enhance the efficiency of the banking system by increasing competition.

The initial minimum paid-up capital for a new bank was kept at Rs. 200 crore. The initial
capital was required to be to Rs.300 crore within three years of commencement of business.
The aggregate foreign investment in private banks from all sources (FDI, FII, and NRI)
cannot exceed 74 per cent.

Mergers and amalgamations are a common strategy adopted for restructuring and
strengthening banks internationally. Although the consolidation process through mergers and
acquisitions of banks in India has been going for several years it gained momentum in late
1990s. With increased liberalisation, globalisation and echnological advancement, the

Page 5 of 23
consolidation process of Indian banking sector is likely to intensify in the future, thereby
imparting greater resilience to the financial system. The Reserve Bank ensures that mergers
and amalgamation enhance the stability of the banking system. Thus, the guidelines issued by
RBI on May 11, 2005 laid down the process of merger and determination of swap ratio.

3.2 Licensing of foreign banks

India issues a single class of banking licence to banks and hence does not place any undue
restrictions on their operations merely on the ground that in some countries there are
requirements of multiple licences for dealing in local currency and foreign currencies with
different categories of clientele. Banks in India, both Indian and foreign, enjoy full and equal
access to the payments and settlement systems and are full members of the clearing houses
and payments system. Procedurally, foreign banks are required to apply to RBI for opening
their branches in India. Foreign banks’ application for opening their maiden branch is
considered under the provisions of Sec 22 of the BR Act, 1949. Before granting any licence
under this section, RBI may require being satisfied that the Government or the law of the
country in which it is incorporated does not discriminate in any way against banks from India.
Other conditions as enumerated in Para 2.5 above are required to be fulfilled. Unlike the
restrictive practices of certain foreign countries, India is liberal in respect of the licensing and
operation of the foreign bank branches as illustrated by the following:

India issues a single class of banking licence to foreign banks and does not place any
limitations on their operations. All banks can carry on both retail and wholesale banking.

Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory

rate of premium.

The norms for capital adequacy, income recognition and asset classification are by and large
the same. Other prudential norms such as exposure limits are the same as those applicable to
Indian banks.

3.3 Opening of branches in India by Foreign banks

The policy for approving foreign banks applications to open maiden branch and further
expand their branch presence has been incorporated in the ‘Roadmap for presence of Foreign
banks in India’ indicated in the Press Release dated February 28, 2005 as well as in the
liberalized branch authorisation policy issued on September 8, 2005. The branch authorisation
policy for Indian banks has been made applicable to foreign banks subject to the following:

1. Foreign banks are required to bring an assigned capital of US $25 million up front at
the time of opening the first branch in India.
2. Existing foreign banks having only one branch would have to comply with the above
requirement before their request for opening of second branch is considered.
3. Foreign banks may submit their branch expansion plan on an annual basis.

Page 6 of 23
 4. In addition to the parameters laid down for Indian banks, the following parameters
would also be considered for foreign banks:
5. Foreign bank’s and its group’s track record of compliance and functioning in the
global markets would be considered. Reports from home country supervisors will be
sought, wherever necessary.
6. Weightage would be given to even distribution of home countries of foreign banks
having presence in India.
7. The treatment extended to Indian banks in the home country of the applicant foreign
bank would be considered.
8. Due consideration would be given to the bilateral and diplomatic relations between
India and the home country.
9. The branch expansion of foreign banks would be considered keeping in view India’s
commitments at World Trade Organisation (WTO). Licences issued for offsite
10. ATMs installed by foreign banks are not included in the ceiling of 12. In terms of
India’s commitment to WTO, as a part of market access, India is committed to permit
opening of 12 branches of foreign banks every year. As against these commitments,
Reserve Bank of India has permitted upto 17- 18 branches in the past.

The Bank follows a liberal policy where the branches are sought to be opened in
unbanked/under-banked areas. Off-site ATMs are not counted in the above limit.
Including off-site ATMs, foreign banks are having (as on October 15, 2007) placed of
business at 933 locations (273 branches + 660 off site ATMs).

The procedure regarding approval of proposals for opening branches of foreign banks in

India has been simplified and streamlined for the sake of expeditious disposal.
A licence under the provisions of B.R. Act, 1949 enables the foreign banks to carry out any
activity which is permissible to a bank in India. This is in contrast with practices adopted in
many countries, where foreign banks can carry out only a limited menu of activities. As
against the requirements of achieving 40 per cent of net bank credit as target for lending to
priority sector in case of domestic banks, it has been made mandatory for the foreign banks to
achieve the minimum target of 32% of net bank credit for priority sector lending. Within the
target of 32%, two sub targets in respect of advances (a) to small scale sector (minimum of
10%), and (b) exports (minimum of 12%) have been fixed. The foreign banks are not
mandated for targeted credit in respect of agricultural advances. There is no regulatory
prescription in respect of foreign banks to open branches in rural and semi-urban centres.

Page 7 of 23
IV. Differentiated Bank Licensing- Examining Pros and Cons

A. Arguments in Favour of Adopting a Differentiated bank Licensing

4.1 With the broadening and deepening of financial sector, it is observed that banks are
slowly migrating from a situation in the past where the number of banking services offered by
the banks was limited and all banks provided all the services to a situation where banks are
finding their niche areas and mainly providing services in their chosen areas. Many banks
keep the plain vanilla banking as a small necessary adjunct. It is widely recognized that banks
providing services to retail customers have different skill sets and risk profiles as compared to
banks which mainly deal with large corporate clients. The present situation where every bank
can carry out every activity permissible under Section 6 of Banking Regulation Act, 1949 has
the following implications, relevant to the subject under consideration:
a. For a wholesale bank dealing with corporate clients only, it becomes a costly adjunct to
maintain a skeleton retail banking presence. Moreover it becomes difficult for such a
bank to meet priority sector obligations and obligations for doing inclusive banking.
b. Retail banks may have to create risk management and regulatory compliance structures
which are more appropriate to wholesale banks, thus resulting in non optimal use of
resources.
c. Similar supervisory resources are devoted to banks with different business profiles. This
may also result in non-optimal use of supervisory resources.
d. The priority sector lending regime for foreign banks indicated in paragraph 3.3 has been
causing some discomfort for some of the foreign banks. For example, some of the
foreign banks find it difficult to fulfil even the less rigorous target of 32 per cent in
respect of priority sector advances.
e. Some banks find it difficult to provide “no frills” facility to economically disadvantage.
For them the more liberal licensing regime causes a different set of problems.
f. It appears that given an opportunity, some of the banks may like to follow a niche
strategy rather than competing as full service all purpose banks.

4.2 On the other hand, there are some factors which point towards desirability of continuing
with the existing system of universal banking:
a. In India, the penetration of banking services is very low. Less than 59 % of adult
population has access to a bank account and less than 14 % of adult population has a
loan account with a with a bank. Under such circumstances, it would be incorrect to
create a regime where banks are allowed to choose a path away from carrying banking
to masses.
b. Priority sector lending is important for banks. The revised guidelines on priority sector
lending have rationalized the components of priority sector. For the first time,
investments by banks in securitised assets, representing loans to various categories of
priority sector, shall be eligible for classification under respective categories of priority
sector (direct or indirect) depending on the underlying assets, provided the securitised
assets are originated by banks and financial institutions and fulfil the Reserve Bank of
India guidelines on securitisation. This would mean that the banks' investments in the

Page 8 of 23
 above categories of securitised assets shall be eligible for classification under the
respective categories of priority sector only if the securitised advances were eligible to
be classified as priority sector advances before their securitisation. These measures
would make it easier to comply with the priority sector lending requirements by those
banks which had faced some difficulties in this regard.
c. The business model adopted by such ‘niche’ banks depends heavily on ample inter-bank
liquidity. Any shock leading to liquidity crunch can translate into a run on the bank.
This situation has been clearly illustrated recently in UK in the case of Northern Rock
Bank.

V. WHY NEW BANKS IN INDIA

1. It is generally accepted that greater financial system depth, stability and soundness
contribute to economic growth. But beyond that, for growth to be truly inclusive
requires broadening and deepening the reach of banking. A wider distribution and
access of financial services helps both consumers and producers raise their welfare and
productivity. Such access is especially powerful for the poor as it provides them
opportunities to build savings, make investments, avail credit, and more important,
insure themselves against income shocks and emergencies.
2. As of March 31, 2009, the Indian banking system comprised 27 public sector banks, 7
new private sector banks, 15 old private sector banks, 31 foreign banks, 86 Regional
Rural Banks (RRBs), 4 Local Area Banks (LABs), 1,721 urban cooperative banks, 31
state co-operative banks and 371 district central co-operative banks.
3. The average population coverage by a commercial bank branch in urban areas improved
from 12,300 as on June 30, 2005 to 9,400 as on June 30, 2010 and in rural and semi
urban areas from 17,200 as on June 30, 2005 to 15,900 as on June 30, 2010. The all
India weighted average during the same period improved from 15,500 to 13,400.
4. Though the Indian financial system has made impressive strides in resource
mobilization, geographical and functional reach, financial viability, profitability and
competitiveness, vast segments of the population, especially the underprivileged
sections of the society, have still no access to formal banking services
5. The Reserve Bank is therefore considering providing licences to a limited number of
new banks. A larger number of banks would foster greater competition, and thereby
reduce costs, and improve the quality of service. More importantly, it would promote
financial inclusion, and ultimately support inclusive economic growth, which is a key
focus of public policy.
6. This discussion paper outlines past approaches, international experience, and considers
the various costs and benefits of increasing the number of new banks as well as the pros
and cons of various policy parameters in licensing new banks.

Page 9 of 23
VI. Guidelines on entry of new banks in the private sector

The guidelines for licensing of new banks in the private sector were issued by the
Reserve Bank of India (RBI) on January 22, 1993. Out of various applications received,
RBI had granted licences to 10 banks. After a review of the experience gained on the
functioning of the new banks in the private sector, in consultation with the Government, it has
now been decided to revise the licensing guidelines.

The revised guidelines for entry of new banks in private sector are given below. The
guidelines are indicative and any other relevant factor or circumstances would be kept in view
while considering an application. With the issue of revised guidelines, applications pending
with RBI would be treated as lapsed.

Guidelines
1. The initial minimum paid-up capital for a new bank shall be Rs.200 crore. The initial
capital will be raised to Rs.300 crore within three years of commencement of business.
The overall capital structure of the proposed bank including the authorised capital shall
be approved by the RBI.
2. The promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of
the bank at any point of time. The initial capital, other than the promoters’ contribution,
could be raised through public issue or private placement. In case the promoters’
contribution to the initial capital is in excess of the minimum proportion of 40 per cent,
they shall dilute their excess stake after one year of the bank’s operations. (In case
divestment after one year is proposed to be spread over a period of time, this would
require specific approval of the RBI). Promoters’ contribution of 40% of the initial
capital shall be locked in for a period of five years from the date of licensing of the
bank.
3. While augmenting capital to Rs.300 crore within three years of commencement of
business, the promoters will have to bring in additional capital, which would be at least
40 per cent of the fresh capital raised. The remaining portion could be raised through
public issue or private placement. The promoters’ contribution of a minimum of 40% of
additional capital will also be locked in for a minimum period of 5 years from the date
of receipt of capital by the bank.
4. 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 restricted to 20 per cent within the above ceiling of 40 per cent. In
cases of shortfall in foreign equity contributions by NRIs, designated multilateral
institutions would be allowed to contribute foreign equity to the extent of the shortfall in
NRI contribution to the equity. The proposed bank shall obtain necessary approval of
Foreign Investment Promotion Board of the Government of India and Exchange Control
Department of RBI.

Page 10 of 23
 5. The new bank should not be promoted by a large industrial house. However, individual
companies, directly or indirectly connected with large industrial houses may be
permitted to participate in the equity of a new private sector bank up to a maximum of
10 per cent but will not have controlling interest in the bank. The 10 per cent limit
would apply to all inter- connected companies belonging to the concerned large
industrial houses. In taking a view on whether the companies, either as promoters or
investors, belong to a large industrial house or to a company connected to a large
industrial house, the decision of the RBI will be final.
6. The proposed bank shall maintain an arms length relationship with business entities in
the promoter group and the individual company/ies investing upto 10% of the equity as
stipulated above. It shall not extend any credit facilities to the promoters and
company/ies investing up to 10 per cent of the equity. The relationship between
business entities in the promoter group and the proposed bank shall be of a similar
nature as between two independent and unconnected entities. In taking view on whether
a company belongs to a particular Promoter Group or not, the decision of RBI shall be
final.
7. Conversion of NBFCs into private sector banks An NBFC with a good track record
desiring conversion into a bank should satisfy the following criteria:
a. The NBFC should have a minimum net worth of Rs.200 crore in its latest balance
sheet which will stand increased to Rs.300 crore within three years from the date
of conversion.
b. The NBFC should not have been promoted by a large Industrial House or
owned/controlled by public authorities, including Local, State or Central
Governments.
c. The NBFC should have acquired a credit rating of not less than AAA rating (or its
equivalent) in the previous year.
d. The NBFC should have an impeccable track record in compliance with RBI
regulations/directions and in repayment of public deposits and no default should
have been reported.
e. The NBFC desiring conversion into bank should have capital adequacy of not less
than 12 per cent and net NPAs of not more than 5 per cent.
f. The NBFC on conversion to a bank will have to comply with Capital Adequacy
Ratio and all other requirements such as lending to priority sector, promoters’
contribution, lock-in period for promoters’ stake, dilution of promoters’ stake
beyond the minimum, NRI and foreign equity participation, arms length
relationship, etc. as applicable to banks.

Other Requirements
1. The bank shall be required to maintain a minimum capital adequacy ratio of 10 per cent
on a continuous basis from the commencement of its operations.
2. In order to ensure level playing field;
a. The new bank will have to observe priority sector lending target of 40 per cent of
net bank credit as applicable to other domestic banks, and

Page 11 of 23
 b. The new bank will be required to open 25 per cent of its branches in rural and
semi-urban areas to avoid over concentration of their branches in metropolitan
areas and cities on the same lines as new private sector banks established under
guidelines laid down by RBI in January 1993.
3. The promoters, their group companies and the proposed bank shall accept the system of
consolidated supervision by the Reserve Bank of India.
4. The new bank shall not be allowed to set up a subsidiary or mutual fund for at least
three years from the date of commencement of business.
5. The headquarters of the proposed new bank could be in any location in India as decided
by the promoters.
6. The new bank shall make full use of modern infrastructural facilities in office
equipments, computer, telecommunications etc. in order to provide cost-effective
customer service. It should have a high powered Customer Grievances Cell to handle
customer complaints.
7. The new bank will be governed by the provisions of the Banking Regulation Act, 1949,
Reserve Bank of India Act, 1934, other relevant Statutes and the Directives, Prudential
regulations and other Guidelines/Instructions issued by RBI and the regulations of SEBI
regarding public issues and other guidelines applicable to listed banking companies.

Procedure for Applications

1. In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949 applications
shall be submitted in the prescribed form (Form III). In addition, the applications should
furnish a project report covering business potential and viability of the proposed bank,
the business focus, the product lines, proposed regional or locational spread, level of
information technology capability and any other information that they consider relevant.
The project report should give as much concrete details as feasible, based on adequate
ground level information and avoid unrealistic or unduly ambitious projections.
Applications should also be supported by detailed information on the background of
promoters, their expertise, track record of business and financial worth, details of
promoters’ direct and indirect interests in various companies/industries, details of
credit/other facilities availed by the promoters/ promoter company (ies)/other Group
company (ies) with banks/financial institutions, and details of proposed participation by
foreign banks/NRI/OCBs.
2. Applications for setting up new banks in the private sector, along with other details as
mentioned above, should reach the following address before March 31, 2001.

The Chief General Manager-in-Charge,

Department of Banking Operations and Development,
Reserve Bank of India,
World Trade Centre, Centre I,
Cuffe Parade, Colaba,
Mumbai 400 005

Procedure for RBI decisions

Page 12 of 23
1. In view of the increasing emphasis on stringent prudential norms, transparency,
disclosure requirements and modern technology, the new banks need to have strength
and efficiency to work profitably in a highly competitive environment. As a number of
banks are already functioning, licences will be issued on a very selective basis to those
who conform to the above requirements and who are likely to conform to the best
international and domestic standards of customer service and efficiency. Preference will
however be given to promoters with expertise of financing priority areas and in setting
up banks specialising in the financing of rural and agro based industries. The number of
licences to be issued in the next three years may be restricted to two or three of the best
acceptable proposals. This number would also include permission granted to any NBFC
for conversion into bank. {If the number of acceptable proposals of the highest
standards are more than three, this limit may be relaxed on recommendation of the
Advisory Committee (see below). In that case the period for issuing new licences may
be stretched to four or five years}.
2. At the first stage, the applications will be screened by RBI to ensure prima facie
eligibility of the applicants. Thereafter, the applications will be referred to a high-level
Advisory Committee to be set up by RBI comprising Dr. I.G. Patel, former Governor of
Reserve Bank of India; Chairman Shri C.G. Somiah, former Comptroller and Auditor
General of India; Member Shri Dipankar Basu, former Chairman of State Bank of India;
Member Chief General Manager of the Department of Banking Operations and
Development of RBI will be the Secretary of the Advisory Committee.
3. The Committee will set up its own procedures for screening the applications. The
Committee will reserve the right to call for more information as well as have
discussions with any applicant/s and seek clarification on any issue as required by it.
The Committee will submit its recommendations to RBI for consideration within three
months after the last date of receipt of applications by RBI (i.e. 30 June 2001). The
decision to issue an in-principle approval for setting up of a bank will be taken by RBI.
RBI’s decision will be final.
4. The validity of the in-principle approval issued by RBI will be one year from the date of
granting in-principle approval and would thereafter lapse automatically.
5. After issue of the in-principle approval for setting up of a bank in the private sector, if
any adverse features are noticed subsequently regarding the promoters or the
companies/firms with which the promoters are associated and the group in which they
have interest, the Reserve Bank of India may impose additional conditions and if
warranted, it may withdraw the in-principle approval.

Page 13 of 23
VII. Conclusion
After completing this term paper I come to know the various procedure and regulation to open
a new bank. As being a private entity we can open a private sector bank but have to complete
all the required documents by RBI. In the 2010-11 RBI is planning to issue new banking
licence to various companies and Corporates. Many foreign players are also waiting for the
licence, but this time RBI may amend certain policies regarding the new banks licensing. The
banking sector is emerging as a booming sector in rural as well as urban areas. The products
and services are getting advance and competitive everyday. People are now more aware about
their choice. RBI may ask for amalgamation of low performing banks with new banks. In
August 2010, RBI has issued discussion paper on ‘License Issue to New Banks’ from various
organizations and Corporates, which includes;
1. Minimum capital requirements for new banks and promoters contribution
2. Minimum and maximum caps on promoter shareholding and other shareholders
3. Foreign shareholding in the new banks
4. Eligible Promoters
a. Whether industrial and business houses could be allowed to promote banks
b. Should Non-Banking Financial Companies be allowed conversion into banks
or to promote a bank
5. Business Model
Full discussion paper can be read at:
www.rbidocs.rbi.org.in/rdocs/content/PDFs/FIDIS110810.pdf

Page 14 of 23
VIII. Annexure:
I. Annual Business Plan - Profile of the bank

1. Name and address of the bank

2. Licence No. and date of licence

3. Area of Operation (as approved by RBI)

4. Whether bank has an elected Board of Directors?

5. If so, whether there are two professional directors?

6. No. of existing branches (List of branches to be annexed), their location and the population of
the centre where the branch is located as per latest census
7. No. of existing extension counters (List to be annexed) with address

8. No. of existing Off Site ATMs (List to be annexed) with address

9. Whether there were / are any default in CRR/SLR

(If yes, give details and the reasons for the same)

Page 15 of 23
 II. Annual Business Plan

Information to be submitted along with Annual Business Plan

Name of the bank:

1. Medium Term policy for branch expansion programme of the bank. Bank may furnish details of the
proposed Medium Term Policy for its branch expansion inclusive of branches & ATMs for a
period of 3 years

2. Expected level of business in the next 3 years-

A. Deposits

B. Advances

3. Expected level of capital augmentation required for the branch expansion and measures proposed to
meet the same in order to maintain CRAR at a minimum of 10% on a continuous basis

4. Technology implementation

A. No. of branches fully computerised

B. No. of branches with net work connectivity

C. No. of branches with Core Banking Solution (CBS)

The bank may also submit a brief write-up on the existing technological infrastructure, various
technology initiatives undertaken and the proposed enhancement/upgradation of technology for
achieving its business goals in the medium term.

5. Measures to promote financial inclusion

6. Steps proposed to be taken by the bank to ensure that the quality of customer service does not get
adversely affected due to expansion of branches.

7. Details of complaints received and disposed of during the last two years

8. Measures proposed by the bank to address the following issues arising out of scaling up of
operations due to the proposed branch expansion-

Internal control and audit

Housekeeping and reconciliation
Other areas of Operational risk
HR issues
9. Any other information

Page 16 of 23
 III. Annual Business Plan - Financial Position as per audited balance sheet (latest)

(Rs. lakhs)

Name of the bank:

Sl. No. Particulars As at the end of March of the

year

1 Share capital

2 Reserves

3 Deposits

4 Borrowings

5 Loans and Advances

6 Percentage of priority sector advances to the outstanding

loans and advances

7 Credit Deposit Ratio

8 Net profit

9 CRAR @

10 Gross NPAs@

11 Net NPAs@

12 Provisions made towards NPAs as per RBI guidelines@

13 Net Worth

@ Certificate from the Statutory Auditors to be enclosed

Page 17 of 23
 IV. Format of authority of the institution in the premises

Of which the extension counter is to be opened

----------------------------------------------------------------------------

Date:

1. We have requested ___________________________________ to open its

(Name of the bank)

Extensions counter in the premises of ________________________________________

(Name and full address) of the institution)

_______________________ for the benefit of the following persons attached to the above institution. @

* Workers …………………….. )

* Staff/Employees …………………….. ) Please indicate actual

) numbers separately

* Students ……………………...)

* Teachers ………………………)

@ (where there are more than one institution being managed by the authority issuing this letter which
are also to be benefited by the extension counter, the names of these institutions, their distance from the
proposed location of the extension counter, the number of students/staff, etc. attached separately to each
of the institutions, the name and the distance of their bankers should also be indicated separately.)

* Strike out whichever is not applicable.

2. (A) ______________________________________________________________

(Name of the bank and place)

Is our principal banker

We also deal with the following bankers (give names of bankers and their distance from the institution)

1. _______________________________________
2. ________________________________________
3. ________________________________________

(b) Extent of our Accounts with the principal banker and other bankers as on
_______________200

Page 18 of 23
 (Latest position please)

Name of the bank Type of account/s Amount

Maintained Rs. lakh

_______________ ______________ ________

1.

2.

3.

4.

3. We undertake to provide necessary accommodation for the extension counter within the premises of our
institution (mentioned at Sr.No.1 above)

4. We have no objection to the bank to provide safe deposit lockers and allow outsiders also to have
access to the extension counter.

5. If the extension counter is allowed to a bank other than the principal banker, the reasons therefore.

6. Whether a similar letter to any other banker for the purpose has been issued.

(Signature of Competent Authority on behalf of

the institution mentioning designation and seal, if
any)

Page 19 of 23
 V. Annual Business Plan - Plan of action for opening branches

Name of the bank: Board Resolution approving the plan of action for opening the branches and the
particulars of centres at which the bank proposes to open branches

Name of the centre Population of the Name of the district Whether the proposed
centre, is within bank's
with address and centre area of operation

Pin code No.

Note: Reasons for the proposed branch including adequacy of banking facilities at the centre, business prospects
at the proposed place of business within 12 months (an estimate of minimum business which the UCB expects to
attract). A viability study report (as per proforma given below) for the proposed branch containing the potential
available in the area, estimate of income and expenditure and likely period of break-even etc. may be submitted

Name of Population No. of Population Deposits Advances

centre of centre bank expected to
and branches be served
district at centre
1st 2nd 3rd 1st 2nd 3rd
year year
year Year Year Year

Estimated Income Estimated Expenditure Profit/Loss

1st 2nd 3rd year 1st 2nd 3rd year 1st 2nd 3rd year
year year year year year year

Page 20 of 23
 VI. Annual Business Plan - Plan of action for opening Off Site ATMs

Name of the bank: Board Resolution approving the plan of action for opening off Site ATMs and the
particulars of centres at which the bank proposes to off Site ATMs

Name of the centre Population of the Name of the district Whether the proposed
centre, is within bank's
with address and centre area of operation

Pin code No.

Note: Indicate briefly the benefits expected to accrue by way of installation of ATMs, cost involved, etc.

Page 21 of 23
VII. Annual Business Plan - Reporting Format for the Issue and Operations of ATM-Cum-Debit
Cards

1. Name of the Bank-

2. Period of Reporting-

3. Type of the card with hardware components-(IC Chip) e.g., Magnetic strip, CPU, Memory-

4. Type of the software used-

5. Security standards followed-

6. Service provider (Self or otherwise)-

7. Total number of outlets where the ATM-cum-debit card can be used of which-

(a) POS Terminal-

(b) Merchant Establishment-

(c) ATMs-

(d) Others please specify.

8. Total number of cards issued-of which-

(a) Against Currant account-

(b) Against Savings account-

(c) Against Float Account-

9. Total Number of Transactions during the period-

10. Amount involved in the Total Number of Transactions-

11. Instances of frauds, if any, during the period.

(a) No. of frauds-

(b) Amount Involved-

(c) Amount of loss to the bank-

(d) Amount of loss to the card holder

Page 22 of 23
IX. Bibliography:
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=9795#III

http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=4350

http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=11256

http://www.finmin.nic.in/

Page 23 of 23