licensing of indian company as bank

Ever since the independence, banking had been the backbone of the Indian Economy. The growth prospective of our nation is based on its well-built banking system. And in recent times, the Indian Banking Industry has witnessed continued growth in demand and this substantially increasing market size of the Banking Industry clearly indicates its growth potential, and thus forming a Banking Company can be absolutely lucrative. But unlike the unregulated markets, the formation of a Banking Company entails the awareness of a variety of legal issues. And thus, accordingly, the present article discusses and explains the various matters relating to the formation of a Banking Company in India.

The Banking Industry as it stands today is just limited to just 34 Banking Companies, out of which 12 are public sector banks and the remaining 22 are private sector banks. Statistically, the banking industry in India yields 7.7% of the nation’s GDP and has a market size of around 105 Trillion Rupees. Despite all these facts, 20% of the Indian population doesn’t have a bank account, and this fact clearly indicates the growth potential of the banking industry in India.

Meaning of the word bank and banking company

The definition of the words Banking and Banking Company is been provided under Section 5(b) and Section 5(c) of the Banking Regulation Act, 1949 (herein referred to as the Act) respectively.

Section 5(b) of the Act provides for the feature of Banking. These features are:

Accepting deposits from the general public,
Lending or further investing the money received from such deposits,
The money is repayable on demand, and
The money deposited can be withdrawn by cheque, draft, order or otherwise.

Section 5(c) of the Act defines banking company as a company which transacts the business of banking. The explanation to the section makes it clear that any company which accepts deposits merely for the purpose of financing its business will not be treated as a banking company. This explanation had been added because Section 58-A of the Companies Act also empowers the company to accept deposits from public.

Business of banking

section 6 of the Act provides for the activities that constitutes the business of banking.

Borrowing, raising or taking up of money;
Advancing of money;
Making, accepting, discounting of bill of exchange, pro notes, bill of lading, railway receipts, etc;
Acting as an agent of the government to carry the work of clearing and forwarding of goods;
Contracting, negotiation, and issuing public and private loans;
Insuring, guaranteeing, underwriting, participating of shares, stocks, debentures, of any company;
Managing, selling, realizing any property which comes into possession of company;
Undertaking and executing trusts;
Administration of estates;
Selling, managing, exchanging, leasing, mortgaging or dealing of any part of company’s property, etc;
Other tasks incidental to the above-mentioned functions;
Any other function as notified by the central government.

Registration of a company under the provisions of the Companies Act

The first and the foremost requirement for the formation of a banking company in India is that the applicant needs to be a ‘Company’ formed under the provisions of The Companies Act, 1956. Any person who wishes to start a banking business in India needs to set up a separate legal entity distinct from is owner. The procedure for the formation of a company is given under Section 7 of the Act. Every company needs to register itself with the registrar of the company, by filing an application and submitting the relevant documents like MoA and AoA. If the registrar is satisfied with all documents, then he will issue a certificate of registration under Section 7(1).

Capital requirements

Section

Place of Incorporation

Capital Required

11(2)

Banking Company Incorporated Outside India (Foreign Banking Company)

If business is in the city of Bombay or Calcutta: amount of its paid up capital shall not be below twenty lakhs rupees.

If no business in the city of Bombay or Calcutta: amount of its paid up capital shall not be below fifteen lakhs rupees.

11(3)

Banking Company is Incorporated in India

If it has place of business in more than one state: five lakhs rupee and if such a place is Bombay or Calcutta then ten lakh rupees.
If it has place of business in more than one state none of which is situated in Bombay or Calcutta: One Lakh rupees in respect of the principal place of business + Ten Thousand rupees for each place where its business is situated in same district, + Twenty five thousand rupees of each place of business situated elsewhere in the state other than in the district.
If it has a place of business in one state, one or more of which is situated in Bombay or Calcutta: Five lakh rupees + twenty five thousand rupees for each place outside Bombay and Calcutta.

Points to be noted:

Provided further that no banking company incorporated in India shall be required to have a paid-up capital requirement exceeding ten lakh rupees.
The amount stated above needs to be deposited and keep deposited with the Reserve Bank of India, either in cash or in any form is unencumbered approved security.
These are just the statutory requirements of capital and reserves. But in actuality, the Reserve Bank of India prescribes the guidelines for licensing of a new banking business in India. The capital requirements for the formation of a new banking company is required to be maintained according to the guidelines of the RBI.

Management of the banking companies

So according to Section 10-A every company is required to constitute a Board of Directors, and while constituting the BOD the following points need to be considered:

51% of the members of the BOD should have special knowledge or practical experience in the field of accounts, banking, finance, law, agriculture and rural development, Co-operation, small scale industry or any other field as prescribed by the Reserve Bank of India.
None of the members of the BOD shall have a substantial interest in the company and must not be connected to the company as a manager, agent, employee, etc (this provision does not applies to a company registered under Section 25 of the Companies Act).
The members should not be a member of any trading, commercial or industrial concerns.
No director shall hold the office (except chairman or whole-time director) shall hold the office for a period exceeding 8 years.
On failure of compliance with the above provisions the Reserve Bank of India is empowered to appointment any suitable person for such a job.

Further Section 10 of the Act prohibits for employment of certain person which includes:

Person adjudicated as insolvent;
Who have compounded with his creditors;
Convicted for some criminal act involving moral turpitude;
Person whose remuneration is taken in form of commission or profit on shares;
Person who is a director of its subsidiary company;
Person who is the director of a company registered u/s 25 of the Companies Act.

Licensing of banking companies

Section 22 of the Act provides that no banking company is permitted to carry on the banking business in India unless it holds a license issued on behalf of the Reserve Bank. Such a license is issued only when the RBI is satisfied that all the conditions are satisfied. Since the banking is the backbone of the Indian Economy, so for the smooth conduct of the banking business in India is it important that no unscrupulous element is added to this banking industry. So the licensing system makes sure that no undesirable element is taking part in the Indian banking system.

Procedure: Every company desiring to start a banking company shall before commencing the banking business in India, shall apply in writing to the Reserve Bank of India.

Condition: Section 22(3) states that the Reserve Bank is required to be satisfied with the following conditions before granting license:

That the company will be in a stance to pay its present and future depositors;
That the affairs of the company are not conducted in a manner which is detrimental to the banking business;
That the management structure of the company is not prejudice to public interest;
That the company has adequate capital as prescribed under the statute and prescribed by RBI;
That the public interest will be served if the license is granted;
That adequate facilities are available in the proposed business area of the firm.

Cancellation of License: Section 22(4) states the situations where the RBI is entitled to cancel a banking business:

If the company ceases to carry on the business of banking;
If the company fails to comply with the conditions mentioned under the Act

FAQs

What is the process for obtaining a banking license in India for an Indian company?

The Reserve Bank of India (RBI) is the regulatory authority responsible for issuing banking licenses in India. The process typically involves submitting an application to the RBI along with detailed business plans, financial projections, and other required documents. The RBI evaluates the application based on various criteria including the company’s financial strength, governance structure, compliance record, and proposed business model.

What are the eligibility criteria for obtaining a banking license in India?

The RBI has set stringent eligibility criteria for companies seeking a banking license. These criteria include minimum capital requirements, a robust corporate governance framework, a sound business plan, and a commitment to financial inclusion and regulatory compliance. The RBI also assesses the company’s track record, reputation, and suitability to operate as a bank.

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