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The regulatory regime applicable to banks

The RBI is the key regulator for all banks, and it regulates all public deposit-taking and lending business in India. Any entity accepting demand deposits from the public and lending to the public must necessarily be licensed with the RBI as a bank.

i Licensing of banksLicensing for public sector banks

All banks in India (including foreign banks operating through RBI licensed branches) are governed by the RBI Act, 1934 (RBI Act) and the Banking Regulation Act, 1949 (BR Act). In addition, most PSBs are incorporated, governed and licensed by and under their specific legislative enactments. Most of the PSBs are listed on the stock exchanges in India, with the government holding and controlling a majority stake in them.

Licensing for private sector banks

Private sector banks are primarily governed by the BR Act and the RBI Act, and are licensed to undertake banking activities by the RBI.

To encourage competition and innovation in the banking sector, the RBI issued at will banking licensing regulations for granting universal banking licences to eligible entities. Moving away from the previous stop-and-go licensing policy, the RBI now permits resident individuals and professionals, entities and groups in the private sector that are owned and controlled by residents, and existing non-banking financial companies that are controlled by residents, to apply to the RBI to set up a universal bank.

Licensing for foreign banks

Typically, foreign banks (i.e., those incorporated and registered as banks outside India) that wish to engage in banking business in India must be licensed by the RBI to set up branches in India. Pursuant to the Scheme for Setting up of Wholly Owned Subsidiaries by Foreign Banks in India, issued in November 2013 for the setting up of WOS by foreign banks, the RBI has now mandated certain foreign banks to incorporate WOS in India.

Licensing for payments banks

Payments banks are a relatively new category with a limited banking licence, and are not permitted to undertake lending activities. They are expected to provide small savings accounts and digital payments and remittance services to migrant labour workforces, low-income households, small businesses, other unorganised sector entities and other retail users.

Unlike universal banks, payments banks are permitted to undertake only limited activities, including acceptance of demand deposits, issuance of debit cards, internet banking and acting as business correspondents for other banks. So far, the RBI has issued final licences to 11 payments banks, out of which only seven have started their operations.

Licensing for small finance banks

SFBs are expected to cater for the banking requirements of micro and small enterprises, agriculture and banking services in unbanked and under-banked regions of the country.

These banks are permitted to undertake the basic activities of accepting deposits (both demand and term deposits) and lending to non-served and underserved sections. Many entities have shown an interest in the SFB space, and 10 entities have already received a final licence from the RBI.

Licensing for regional rural banks

The RBI has also issued banking licences to RRBs to further its goal of financial inclusion and agricultural financing. RRBs are established under specific legislative enactments and are regulated by the National Bank for Agriculture and Rural Development, an independent financial institution focused on agricultural lending.

ii Other activities permitted to be undertaken by banks

SCBs in India are generally permitted to undertake core banking and para banking activities. Certain para banking activities, such as investment advisory and stockbroking, may only be undertaken by an SCB through a separate entity, such as a subsidiary (and not departmentally), whereas certain other businesses, such as insurance distribution, may be undertaken either departmentally or through a separate entity.

The RBI has mandated all banks, both Indian and foreign (including those not having an operational presence in India), to obtain prior approval from the RBI for any schemes marketed by them in India to residents either for soliciting foreign currency deposits for their foreign or overseas branches, or for acting as agents for overseas mutual funds or any other foreign financial services company.

iii Priority sector lending

The RBI has mandated separate priority sector lending (PSL) targets for all SCBs (including foreign banks and SFBs). Agriculture, micro, small and medium-sized enterprises, export credit, education, housing, social infrastructure and renewable energy are a few PSL sectors identified by the RBI. Typically, SCBs must allocate 40 per cent of their adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, to PSL sectors. SFBs, however, must allocate 75 per cent of their adjusted net bank credit to PSL sectors.