Article:
The Reserve Bank of India (RBI) has established a five-member Standing External Advisory Committee (SEAC). This committee, chaired by former Deputy Governor of the Reserve Bank, Shyamala Gopinath, is tasked with evaluating applications for universal banks and Small Finance Banks (SFBs).
Standing External Advisory Committee
Comprising individuals of eminence with experience in the financial sector, banking and other relevant domains, the committee is primed to carry out its essential functions. The SEAC will serve for a tenure of three years, with RBI’s Department of Regulation extending secretarial support. Upon receipt of applications for universal banks and SFBs, the RBI will first undertake a preliminary evaluation to gauge applicants’ eligibility. Following this, the SEAC will then thoroughly assess the applications.
About Small Finance Banks (SFBs)
SFBs are financial establishments delivering services to the unbanked and unserved regions of the nation. Registered as public limited companies under the Companies Act, 2013, they primarily handle basic banking operations. These small finance bank operations span the acceptance of deposits, lending to micro & small industries, unorganised sector entities, small business units, and marginal farmers.
Though authorised to engage in non-risk sharing simple financial services activities without any commitment of own funds, SFBs also have provisions to distribute pension products, insurance products, mutual fund units, etc. They can also act as an Authorised Dealer in foreign exchange business for their clients’ needs.
The operational scope of these banks is vast, but a preference exists for applicants who initially establish their bank in under-banked regions such as the North-East, East, and Central parts of India.
Universal Banks Overview
Universal Banks are financial entities like commercial banks, Financial Institutions, Non-Banking Financial Companies (NBFCs), which perform various financial activities under a single roof, thereby creating a financial supermarket. These establishments leverage their extensive branch network and deliver a host of services under a single brand or the bank’s name.
Eligibility criteria for promoting universal banks require resident individuals and professionals to possess at least 10 years of senior-level experience in finance and banking. However, large industrial houses, although excluded as eligible entities, are granted permission to invest up to 10% in these banks.
New Development
An internal working group within the RBI has previously proposed a revamp of licensing policy for private banks in 2020. This proposal entertained the idea of allowing significant corporate and industrial units to start banks in India, necessitating relevant amendments to the Banking Regulation Act, 1949. Critics of this proposition include former RBI Governor Raghuram Rajan, underlining the risk of “connected lending.”
Non-Operative Financial Holding Company
A Non-Operative Financial Holding Company (NOFHC) is a non-deposit taking NBFC. As the Bank Guidelines dictate, promoter or promoter groups are permitted to establish a new bank solely through a wholly-owned NOFHC. This NOFHC then interacts with the Bank along with other financial service companies regulated by RBI or permitted financial sector regulators.
‘On-tap’ Licensing of Universal Bank
The term ‘on-tap’ extension indicates that the RBI will continually receive applications and grant licenses for banks throughout the year. This policy permits aspirants to apply for a universal bank license at any given time, provided they fulfill set conditions.