In February 2013, the Reserve Bank of India released the Guidelines for Licensing of New Banks in the Private Sector (PR_28191). Within weeks, the queries started arriving — from industrial groups, NBFCs, private equity firms, and individuals, all trying to decode what the central bank actually wanted. By June 2013, the RBI had received enough questions to compile ninety-nine of them into a formal clarifications document, posted publicly so that all applicants could benefit from the answers. The announcement that clarifications would be posted on the website (PR_28272) signalled that the RBI wanted no ambiguity about what it expected.
What these ninety-nine questions reveal is more interesting than any individual answer. They expose the assumptions that prospective applicants carried into the process — assumptions about who should run a bank, how much foreign money should be involved, what corporate structures are acceptable, and whether industrial empires could extend into banking. The RBI's answers, read together, amount to a doctrine: banking in India is not a business opportunity to be seized but a public trust to be earned.
See also: How India Licences New Banks | What the RBI Looks For When It Licences a New Bank | Licensing & Authorization: The Complete Timeline
What is a Non-Operative Financial Holding Company and why is it required?
The single most distinctive structural requirement of the 2013 licensing framework was the NOFHC — the Non-Operative Financial Holding Company. Every successful applicant was required to create one. The promoter group could not hold the bank directly; it had to hold it through the NOFHC, which also held every other financial services entity in the group.
The February 2013 Guidelines (PR_28191) specified:
"The NOFHC shall be wholly owned by the Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group."
Why did the RBI invent this structure? Because India's financial conglomerates had evolved organically — a group might own an NBFC through one subsidiary, a mutual fund through another, an insurance company through a third, with overlapping shareholdings and opaque inter-corporate deposits connecting them all. The NOFHC was designed to make the group structure transparent and supervisable. All financial entities under one holding company, all visible to the regulator, all ring-fenced from the group's non-financial businesses.
The NOFHC registration circular RBI/2013-14/558 (since withdrawn) operationalised this requirement. The NOFHC itself was registered as an NBFC with the RBI, governed by separate directions, and subject to prudential norms on both standalone and consolidated basis. The word "non-operative" is the key: the NOFHC does not conduct business itself. It exists purely as a supervisory shell — a window through which the RBI can see everything the group does in financial services.
The November 2025 Reserve Bank of India (Universal Banks – Licensing) Guidelines, 2025 (Reserve Bank of India (Universal Banks – Licensing) updated the NOFHC framework with an important relaxation: individual promoters or standalone entities without other group entities are no longer required to create an NOFHC. The direction states that such promoters "would have the option of setting up / converting into a banking company under the Companies Act, 2013." But the moment other group entities enter the picture, the NOFHC becomes mandatory again. The principle endures: if the group is complex, the RBI wants a clean holding structure.
The Reserve Bank of India (Non-Operative Financial Holding Company) Directions, 2025 now governs all NOFHCs, replacing the earlier circulars that had been issued piecemeal since 2013.
Can a foreign entity promote an Indian bank?
This was one of the most frequently asked questions in the clarifications — because the answer is not a simple yes or no. It is a carefully layered set of restrictions.
The 2013 Guidelines (PR_28191) were explicit:
"The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy."
A foreign entity cannot be the promoter. The promoter must be a resident individual or an entity "owned and controlled by residents" as defined under FEMA. A foreign company can invest in the bank's equity — but not control it. The 49% cap on aggregate non-resident shareholding for the first five years ensures that the bank remains resident-controlled during the critical early period when it is building its deposit base and establishing its governance culture.
Why does the RBI care? Because a bank that takes deposits from Indian citizens should be answerable to Indian regulators. A foreign-controlled bank could theoretically be subject to competing regulatory obligations from its home country. More practically, the RBI wants to ensure that the promoter — the person ultimately responsible for the bank's conduct — is within Indian legal jurisdiction.
The 2025 Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) now state more simply: "The foreign shareholding in the bank would be as per the extant FDI policy." The current FDI policy permits up to 74% foreign investment in private sector banks under the automatic route — a significant liberalisation from the 49% cap that applied to new banks. But the promoter must still be resident-controlled. Foreign money can come in as passive investment; it cannot come in as control.
The distinction matters for how India's banking system is structured. Foreign banks operate in India through branches or wholly-owned subsidiaries under a separate framework for foreign bank operations. The new bank licensing route is reserved for domestically controlled entities — a deliberate policy choice to ensure that the expansion of banking is driven by institutions rooted in the Indian regulatory system.
What is the "fit and proper" test — and how does the RBI apply it?
The phrase "fit and proper" appears throughout the licensing guidelines, but its content is more demanding than the phrase suggests. This is not a character reference check. It is a multi-dimensional assessment that the RBI conducts with inputs from other regulators, enforcement agencies, and intelligence sources.
The 2025 Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) specify:
"The Promoters / Promoter Groups should be 'fit and proper' in order to be eligible to promote banks. RBI would assess the 'fit and proper' status of the applicants on the basis of the following criteria."
For individual promoters, the requirements include a minimum ten years of experience in banking and finance at a senior level, a "past record of sound credentials and integrity," and financial soundness with a "successful track record for at least 10 years." For entity promoters, the promoting entity and the promoter group must have the same track record requirements. The direction adds: "Preference will be given to promoting entities having diversified shareholding."
The RBI does not limit itself to what the applicant submits. The 2013 Guidelines (PR_28191) stated that "RBI may seek feedback from other regulators and enforcement and investigative agencies." This means the assessment draws on information from SEBI, IRDAI, the Enforcement Directorate, the CBI, and other bodies that the applicant may not even know have been consulted.
What does "integrity" mean in regulatory context? It means no pending criminal cases involving moral turpitude. No regulatory penalties for fraud, misrepresentation, or market manipulation. No adverse observations in inspection reports from any financial regulator. The historical evolution of the fit and proper concept — from the June 2004 circular on Fit and Proper Criteria for Directors of Banks (Fit and proper criteria for directors of banks) through the Master Direction on Fit and Proper Criteria for Elected Directors (Master Direction - Reserve Bank of India (‘Fit and) — shows the RBI progressively expanding its due diligence scope. The current framework is the most comprehensive version: a prospective bank promoter is evaluated more rigorously than almost any other applicant in Indian regulation.
Can large industrial houses get bank licences?
This question dominated the 2013 discussion — because India's largest conglomerates (Tata, Reliance, Birla, Adani) all had the capital to start a bank, and several were actively interested. The RBI's answer was a calibrated restriction, not an outright ban.
The 2025 Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) specify that entities or groups with total assets of Rs 5,000 crore or more are eligible — but only if:
"the non-financial business of the group does not account for 40% or more in terms of total assets / in terms of gross income."
This is the 40% test. If a group derives more than 40% of its assets or income from non-financial businesses, it cannot promote a bank. The effect is to exclude India's major industrial houses — Tata Sons, Reliance Industries, the Aditya Birla Group — because their core businesses are manufacturing, energy, telecommunications, and infrastructure, not financial services.
Why does the RBI draw this line? Because banking involves taking deposits from the public and deploying them as loans. If an industrial group controls a bank, the risk of connected lending — the bank financing the group's own projects at favourable terms — is structurally embedded. Even with arm's-length safeguards, the RBI concluded that the conflict of interest is too fundamental. The Discussion Paper on Entry of New Banks in the Private Sector (PR_22964) released in September 2010 had debated this question extensively; the final position was that industrial houses could participate as minority shareholders (up to 10%) but not as promoters.
The exposure norms reinforce this prohibition. The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) state:
"Individuals and companies, directly or indirectly connected with large industrial houses are permitted to participate in the equity of a new private sector bank up to 10 per cent and shall not have controlling interest in the bank. However, such shareholders shall not have any Director on the Board of the bank on account of shareholder agreements or otherwise."
Tata Sons withdrew its application (PR_30066) during the 2013 round. The 40% test made the answer clear before the Advisory Committee even convened.
What happens to the promoter's other financial businesses?
The NOFHC requirement has a corollary that many applicants found uncomfortable: every financial business in the group must be brought under the holding company. You cannot keep an NBFC in one subsidiary, an insurance company in another, and the bank in a third — each with its own capital structure and governance arrangements. They must all sit under the NOFHC.
The 2013 Guidelines (PR_28191) mandated that the NOFHC "shall hold the bank as well as all the other financial services entities of the group." The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) continue this requirement for groups with multiple financial entities.
The operational consequence: if a group has an NBFC with Rs 10,000 crore in assets, a housing finance subsidiary, and a mutual fund distribution arm, all of these must be restructured to sit under the NOFHC before the bank licence is granted. For groups that had built their financial services businesses over decades through independent subsidiaries, this was a fundamental restructuring — not just a regulatory filing, but a corporate reorganisation affecting shareholding patterns, governance structures, and inter-entity relationships.
For NBFCs seeking to convert into banks, the 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) provide two paths: promote a new bank alongside the NBFC (both held by the NOFHC), or convert the NBFC itself into a bank. Under both options, "the Promoters will have to set up a NOFHC if they have other entities in their group." The RBI may allow the converting NBFC to retain its existing branches as bank branches — a pragmatic concession that avoids the cost of building a new branch network from scratch.
The purpose of this restructuring requirement goes beyond supervisory convenience. When all financial entities are under one holding company, the RBI can monitor aggregate exposures across the group. It can detect if the bank is lending to the group's NBFC, which is lending to the group's real estate subsidiary — the kind of circular lending that destroyed banks before the modern regulatory framework existed.
Why must 25% of branches be in unbanked rural areas?
This obligation is not a recommendation. It is a condition of the licence. The 2025 Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) state:
"The bank shall open at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per the latest census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence."
Twenty-five per cent is a high bar for a new bank. It means for every three branches in Mumbai, Delhi, or Bangalore, the bank must open one in a village that has no existing bank branch. The economics are punishing: rural branches generate lower deposits, require the same infrastructure costs, and face higher operating expenses due to location. No rational commercial operator would choose this distribution voluntarily.
That is exactly why it is mandatory. The July 2011 branch licensing circular RBI/2011-12/113 RBI/2011-12/113 (since withdrawn) established the 25% rural branch obligation for all banks. The May 2017 Branch Authorisation Rationalisation RBI/2016-17/306 RBI/2016-17/306 (since withdrawn) liberalised branch opening in most areas but preserved the rural mandate. The obligation reflects a core principle of Indian banking regulation: the licence to accept public deposits comes with a duty to serve the public — including populations that the market would not serve on its own.
The business plan requirement (Reserve Bank of India (Universal Banks – Licensing) goes further: "The business plan will have to address how the bank proposes to achieve financial inclusion." The RBI evaluates the business plan for viability — and "in case of deviation from the stated business plan after issue of licence, RBI may consider restricting the bank's expansion, effecting change in management and imposing other penal measures as may be necessary." The social obligation is not aspirational language; it is a contractual term of the licence, breach of which carries penalties up to cancellation.
For the connection between priority sector lending obligations and the rural branch mandate, see Why Banks Must Lend to Farmers and How the RBI Uses District Weights to Steer Credit.
What is the minimum capital — and why Rs 1,000 crore?
The initial minimum paid-up voting equity share capital has evolved significantly since the first private bank licensing round in 1993.
The 2013 Guidelines (PR_28191) set the minimum at Rs 500 crore (Rs 5 billion). The 2025 Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) doubled it:
"The initial minimum paid-up voting equity share capital/ net worth for a bank shall be ₹1,000 crore. Thereafter, the bank shall have a minimum net worth of ₹1,000 crore at all times."
The doubling reflects both inflation and the RBI's experience with the 2013-14 licensing round. Banks need capital not just to start operations but to sustain losses during the initial years when branch expansion outpaces revenue growth, to meet priority sector lending targets that may not be immediately profitable, and to absorb unexpected credit losses. A Rs 500 crore bank in 2013 needed to maintain a 13% capital adequacy ratio against its risk-weighted assets — and the build-up of risk-weighted assets during the early years of aggressive lending can consume capital faster than anticipated.
The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) specify the ongoing requirement:
"The bank shall be required to maintain a minimum capital adequacy ratio of 13 per cent of its risk weighted assets (RWA) for a minimum period of three years after the commencement of its operations subject to any higher percentage as may be prescribed by RBI from time to time."
The 13% minimum for new banks is higher than the 9% Basel III minimum for existing banks. This differential acknowledges that new banks lack the diversified portfolio, established risk management systems, and depositor base that provide existing banks with additional buffers. The higher capital ratio compensates for the higher operational and execution risk.
For groups with non-financial businesses exceeding 40% but below the exclusion threshold, an additional capital control applies: the 2013 Guidelines required "RBI's prior approval for raising paid-up voting equity capital beyond Rs 10 billion for every block of Rs 5 billion." Every capital raise needed a separate approval — a mechanism for the RBI to reassess the promoter's suitability at each growth stage.
Can the bank's shares be listed from day one?
No. The licensing guidelines impose a listing timeline that balances the need for market discipline against the practical reality that a new bank needs time to establish its track record before facing public market scrutiny.
The 2013 Guidelines (PR_28191) required listing within three years. The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) extended this to six years:
"The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank."
The extension from three to six years is significant. It gives the bank time to establish profitability, build a loan book, develop a track record of asset quality, and achieve scale sufficient for a meaningful public offering. Bandhan Bank, licensed in 2014, listed on the stock exchanges in March 2018 — within the three-year window but after significant preparation.
The promoter shareholding dilution timeline is equally structured. The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) require:
"The promoter/s and the promoter group / NOFHC, as the case may be, shall hold a minimum of 40 per cent of the paid-up voting equity share capital of the bank which shall be locked-in for a period of five years from the date of commencement of business of the bank."
After the five-year lock-in, the promoter must dilute to 26% within fifteen years. This staged dilution ensures that the promoter retains skin in the game during the critical early years but does not permanently dominate the bank's ownership structure. The RBI's vision is clear: over time, the bank should become a widely-held institution, not a family business.
When Bandhan Bank failed to meet its dilution timeline — the promoter entity was supposed to reduce its holding but had not done so — the RBI imposed a monetary penalty of Rs 1 crore (PR_48503). The penalty demonstrated that the dilution schedule is not a guideline; it is an enforceable condition.
How selective is the RBI — and why is the process opaque?
The guidelines themselves caution applicants against expecting that meeting the criteria will guarantee a licence. The 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) warn:
"Banking being a highly leveraged business, licences shall be issued on a very selective basis to those who conform to the above requirements, who have an impeccable track record and who are likely to conform to the best international and domestic standards of customer service and efficiency. Therefore, it may not be possible for RBI to issue licences to all the applicants just meeting the eligibility criteria prescribed above."
This paragraph is the RBI's explicit reservation of discretion. An applicant can meet every stated criterion and still be rejected because the RBI exercises judgment — not just rules — in deciding who gets to run a bank. The procedure for decisions (Reserve Bank of India (Universal Banks – Licensing) states that "RBI may apply additional criteria to determine the suitability of applications, in addition to the 'fit and proper' criteria."
Applications are first screened by the RBI for eligibility, then referred to a Standing External Advisory Committee (SEAC) comprising "eminent persons with experience in banking, financial sector and other relevant areas." The Committee's recommendations go to the RBI, which makes the final decision. The names of applicants are published (PR_29505) — but the reasons for rejection are not.
The shift from periodic licensing rounds to "on-tap" licensing represents a significant philosophical change. Under the 2025 framework (Reserve Bank of India (Universal Banks – Licensing), "the licensing window will be open on-tap. As such, applications in the prescribed form along with requisite information could be submitted to RBI at any point of time." Instead of periodic windows that create a rush of applications, the continuous process allows the RBI to evaluate each application on its merits as it arrives. The Banking Structure Discussion Paper of August 2013 had advocated this shift, arguing that the "stop and go" licensing policy should give way to "continuous authorisation."
What the regulatory ladder now means for licensing
The 2013 framework created a single path: apply for a universal bank licence. The 2025 framework creates a graduated system. A payments bank can aspire to become a small finance bank. A small finance bank can aspire to become a universal bank. A cooperative bank can convert to a small finance bank. Each transition requires meeting the criteria for the next category — and each conversion is a new licensing decision by the RBI.
The in-principle approval to AU Small Finance Bank for transition to a Universal Bank (PR_60977) validated this ladder. So did the in-principle approval to Fino Payments Bank for conversion to an SFB (PR_61762). Chapter II of the 2025 Guidelines (Reserve Bank of India (Universal Banks – Licensing) specifically addresses "Voluntary transition of Small Finance Banks to Universal Banks."
The ninety-nine questions from 2013 were asked in a world where banking licences came in one size. The world they helped shape is one where the path to running a bank is no longer a single door but a staircase — each step higher requiring more capital, more governance, more accountability, and a longer track record of proving you can be trusted with the public's money.
Governing Direction(s): Reserve Bank of India (Universal Banks – Licensing) Guidelines, 2025 (Reserve Bank of India (Universal Banks – Licensing)
Last updated: April 2026