Issuing a banking license in India is at the discretion of the Reserve Bank of India (RBI). Before approving, RBI evaluates multiple factors known as “Tests of Entry” to ensure the applicant meets all regulatory requirements.
RBI Requirements for Bank License in India
RBI may also scrutinize the books of accounts of the applicant company and gather market information before granting a license. Before issuing a license, RBI examines the following:
- Background and credentials of promoters
- Funding aspects of capital
- Sources of funds
- Background of key professionals
- Geographical coverage of the proposed bank
- Business and economic activity to be financed
- Profitability aspects
- Public interest
Legal Framework Under the Banking Regulation Act, 1949
At the commencement of the Banking Regulation Act, 1949, existing banks were required to apply for a license within six months. They were allowed to continue operations until their application was rejected.
The objective of licensing was to:
- Discourage unsound banking practices
- Prevent indiscriminate formation of banks
Sections 11(2) and 11(3) of the Act specify minimum capital and reserves for:
- Foreign banks
- Banks operating in more than one state
- Banks operating in a single state
RBI has the authority to prescribe higher capital requirements for licensing.
Refusal of Bank License by RBI
The decision of the RBI to grant or refuse a banking license cannot be challenged in court if it is based on valid material and proper consideration.
In the case of Shivabhai Zaverbhai Patel vs RBI (1986), the Gujarat High Court upheld RBI’s decision to reject a banking license application based on detailed evaluation and facts.
Licensing of Foreign Banks in India
Foreign banks must obtain a license under the Banking Regulation Act, 1949 to operate in India.
Foreign banks must apply to the RBI under Section 22 of the Act. RBI ensures that the applicant’s home country does not discriminate against Indian banks.
Key points include:
- A single class of banking license is issued in India
- No undue restrictions on operations
- Foreign banks can perform both retail and wholesale banking
- Equal access to payment and settlement systems
- Membership in clearing houses
Features of Foreign Bank Licensing in India
India follows a non-discriminatory approach toward foreign banks.
- Uniform deposit insurance coverage
- Same capital adequacy norms as Indian banks
- Similar income recognition and asset classification rules
- Equal exposure norms
Licensing of Private Sector Banks in India
Before 1993, private sector bank licenses were issued routinely under Section 22 of the Banking Regulation Act, 1949.
In 1993, RBI introduced new guidelines as part of economic liberalization.
In 2001, revised guidelines led to licensing of banks like:
- Kotak Bank
- Yes Bank
This policy was known as the “Stop and Go” policy.
Continuous Authorization Policy (On-Tap Licensing)
In February 2013, RBI reviewed the licensing system and introduced a new approach.
From August 1, 2016, RBI implemented the “continuous authorization” or “on-tap licensing” policy to increase competition and innovation in banking.
Key Features of On-Tap Licensing Policy
1. Eligibility for Individuals and Professionals
- Must be residents as per FEMA
- Minimum 10 years of experience in banking and finance
2. Eligibility for Private Sector Entities
- Owned and controlled by residents
- Minimum 10 years of successful track record
- Total assets of ₹50 billion or more
- Non-financial business should not exceed 40%
3. Eligibility for NBFCs
- Controlled by residents
- Minimum 10 years of successful track record
- Eligible to convert into a bank or promote a new bank
(Note: NBFCs with more than 40% non-financial business are not eligible)
4. Fit and Proper Criteria
For Individuals:
- Minimum 10 years of experience
- Strong financial background
- Proven track record
- High integrity
For Entities/NBFCs:
- Minimum 10 years of business experience
- Financial stability
- Clean track record
- Preference for diversified shareholding
Conclusion: on-tap licensing policy
The process of obtaining a bank license in India is detailed and strictly regulated by RBI. It ensures that only financially sound and credible entities enter the banking sector.
The introduction of the on-tap licensing policy has made the system more flexible while maintaining strict regulatory standards.