The baking regulation act summarizes governance and supervision on the bank, including the legislation, the regulatory bodies, the role of international standards, rules relating to licensing the bank, the requirement of foreign investment and the recent trend in regulating bank.

 Legislation and regulatory authorities

Legislation

The business related to banking and financial service is primarily governed by the Banking Regulation Act 1949. The Reserve Bank of India act 1934 issues guidelines related to the rules and regulations, directions relating to financial sectors and banking in India. The primary regulatory authority in India is the Reserve Bank of India it also known as the central bank.

The cross-boundary transactions are governed by the Foreign Exchange Management Act, 1999. The acts provide the procedure of licensing the Foreign Exchange.

Regulatory authorities

The Reserve Bank of India is the primary regulator of all other banks. The RBI has a wide range of power to regulate the financial system in India. The RBI Act includes norms for setting up of the bank and licensing the bank, including the establishment of Foreign Bank branch in India, corporate governance and organizations and conditions for services and structuring product. Its other functions include, among other things:

1. Setting monetary policy.
2. Regulation of money, foreign exchange, government securities markets, and financial derivatives.
3. Debt and cash management for the government.
4. Oversight of payment and settlement systems.
5. Currency management.

The RBI has been actively involved in framing regulations for the dynamic changes to the banking sector in India.

 Other authorities

India has several other financial sector regulators, including the:

1. Securities Exchange Board of India (SEBI), which is the regulatory authority for the securities market in India.
2. Insurance Regulatory and Development Authority of India (IRDAI), which regulates the insurance sector.

The RBI often liaises closely with the SEBI, IRDAI and, where required, other financial sector regulators, to regulate banking activities which interact with other financial activities.

• Bank licenses

An entity that wants to carry out banking business in India must obtain a license from the Reserve Bank of India (RBI).

A licensed banking company can also conduct certain ancillary business such as borrowing and lending, trade finance, guarantee, and indemnity business, financial leasing and hire purchase and securitization.

It also requires an entity proposing to deal in foreign exchange to get a separate license as an allowed dealer from the RBI. It issues this license under the Foreign Exchange Management Act. The grant allowed dealers wide-ranging powers to monitor and facilitate foreign exchange and cross-border transactions. It routes all remittances of foreign currency from or into India through such allowed dealers.

• Application

They must apply for a bank license to the Reserve Bank of India (RBI). The RBI has recently introduced a scheme for issuing “on-tap” licenses. This replaces the previous approach which involved a window for applicants to approach the RBI for a license. The application is usually prepared by the company seeking to get the license.

It sets the form of application out in the Banking Regulation (Companies) Rules, 1949. This prescribes different forms, depending on the applicant and whether it is a domestic or foreign company.

They must submit the application with:

1. A copy of the company’s constitutional documents.
2. Copies of a prospectus (for a new company) and the balance sheet and profit-and-loss account statements for the previous five years (for an existing company).

The application must also include:

1. Information on the ultimate individual promoters, including:
2. a self-declaration by the individual promoters in a prescribed form; and
3. Detailed profiles on their individual background and experience, expertise, and business track record.

Information on entities in the promoter group, including:

1. names and details of the promoter group entities;
2. shareholding structure of the entities;
3. a pictorial diagram showing the corporate structure of the entities and the shareholdings and total assets; and
4. Annual reports of the past five years of all the group entities.

  Information on the promoting/converting entity, including:

1. a declaration by the promoting/converting entity in a prescribed form, its shareholding pattern, constitutional documents and financial statements for the previous five years (including important financial indicators);
2. board composition and representation of the directors over ten years;
3. income tax returns for the last three years; and
4. Chartered’s certificate showing the source of funds for the promoting/converting entity.

Information about the persons/entities who will subscribe to 5% or more of the paid-up equity capital of the proposed bank, including foreign equity participation and the sources of capital of the proposed investors.

• Proposed management of the bank.

In addition, the applicant must provide a project report covering:

1. Business potential and viability of the proposed bank.
2. Any other financial services proposed to be offered.
3. Plan for compliance with prudential norms.

With a non-banking financial company as the applicant, how the existing lending business will fold into the bank or be disposed of. The RBI can call for other additional information if required.

• Requirements

They base the RBI’s decision to grant a license on several factors, including whether:

The company is or will pay its present or future depositors in full as their claims accrue.

The company’s affairs are not-being or are not likely to conducted in a manner detrimental to the interests of its present or future depositors. The general character of the proposed management will not be prejudicial to the public interest or its depositors. The company has adequate capital structure and earning prospects. The public interest will be served by granting the license.

In relation to banking facilities in the company’s proposed main area of operations, the potential expansion of banks already in the area and other relevant factors, granting the license is not prejudicial to the operation and consolidation of the banking system, and is consistent with monetary stability and economic growth.

The RBI can also consider any other condition which, in the RBI’s opinion, is necessary to ensure that the company carrying on banking business will not prejudice the public interest or the interests of the depositors.

For Indian incorporated entities seeking a bank license, the initial minimum paid-up voting equity capital must be at least INR5 billion. Thereafter, the bank must have a minimum net worth of INR5 billion.

The RBI’s decision to grant a license is discretionary and based on its assessment of the above conditions.

• Foreign Applicants

Besides the general conditions, in case of foreign entities, the RBI  satisfied that both:

1. The government or law of the country in which it incorporates the foreign bank does not discriminate against banking companies registered in India.
2. The banking company complies with the Banking Regulation Act that applies to bank companies incorporated outside India.

• Cost and duration

Apart from the prudential norms of maintaining capital and liquidity reserves, there are no specific ongoing costs associated with a bank license. In the authors’ experience, bank licenses issued by the RBI are not usually subject to an expiry date. There is no license fee while submitting the form to apply for a banking license.