The RBI does not just regulate banks — it decides who gets to be one. Every banking licence, every branch authorisation, every inclusion in the Second Schedule of the RBI Act is a regulatory decision that shapes the geography of Indian banking. And that geography has changed dramatically: from an era when opening a single branch required months of individual approval, through the 25% unbanked-rural mandate that forced banks into villages with no existing banking presence, to the May 2017 rationalisation that finally gave well-capitalised banks general permission to open branches almost anywhere.
The licensing story runs parallel. India went from periodic licensing rounds — each one a multi-year exercise producing two or three banks — to on-tap licensing where applications can be filed at any time. Along the way, the RBI created entirely new categories of banks: Small Finance Banks to serve the underbanked, Payments Banks for digital transactions, and a conversion pathway that allows one type to become another. The November 2025 consolidation embedded it all into two governing directions that superseded the accumulated circulars of two decades, replacing prior licensing guidelines with a single, unified framework for each bank type.
The Licensing Rounds: From HDFC Bank to Bandhan
India's private banking sector was built in discrete waves, each reflecting the regulatory thinking of its era.
1993-94: The First Round. Following the Narasimham Committee recommendations and the liberalisation of the banking sector, the RBI issued licences to ten new private banks. This round produced institutions that now dominate Indian banking — HDFC Bank, ICICI Bank, Axis Bank (originally UTI Bank), IndusInd Bank. The criteria were minimal by current standards: promoters needed financial credibility and a viable business plan, but there was no NOFHC requirement, no mandatory rural presence, and no differentiated bank category.
2001-04: The Second Round. Two more licences — Kotak Mahindra Bank and Yes Bank. The round was notable for what it revealed about the licensing process: applications from dozens of entities, approval for two, and no public explanation of why most were rejected. The reason for the opacity was partly legal — the RBI faced litigation risk if it published rejection criteria. But the opacity became a persistent criticism, because applicants had no way to know what had driven the rejections or how to address them.
2013-14: The Third Round. The February 2013 guidelines opened the process to NBFCs and public sector entities for the first time, requiring all new banks to operate through a Non-Operative Financial Holding Company (NOFHC) structure. Out of twenty-five applications, two received in-principle approval: IDFC Limited and Bandhan Financial Services.
"The Reserve Bank of India has decided today to grant 'in-principle' approval to two applicants viz., IDFC Limited and Bandhan Financial Services Private Limited, to set up banks under the Guidelines on Licensing of New Banks in the Private Sector issued on February 22, 2013."
The Bandhan licence was the more significant signal. Here was a microfinance institution in West Bengal — not a corporate house, not an NBFC with an industrial promoter — being judged fit to run a full-service bank. It signalled that the RBI was willing to license institutions that served the underbanked, not just institutions that could mobilise urban deposits.
Differentiated Banking: SFBs and Payments Banks (2015-16)
The 2013 round was the last periodic licensing exercise for universal banks. Instead, the RBI created two new categories — because the universal bank model alone could not solve financial inclusion for every segment.
Small Finance Banks: Eleven entities received in-principle approval in September 2015: RBI grants "In-principle" Approval to 10 Applicants for Small Finance Banks (PR_35010). The mandate: at least 75% of adjusted net bank credit must go to priority sector lending, with 50% of the loan portfolio in loans up to Rs 25 lakh. Minimum paid-up capital of Rs 200 crore. CRAR of 15% — significantly higher than the 9% required of commercial banks. SFBs were designed to serve the segment that universal banks underserved: small borrowers, micro-enterprises, unorganised sector workers. The reason for the higher 15% CRAR was that these institutions, with concentrated portfolios of small-ticket loans, faced higher credit risk and needed a deeper buffer to absorb losses.
Payments Banks: Eleven entities received in-principle approval in August 2015: RBI grants "in-principle" approval to 11 Applicants for Payments Banks (PR_34754). Payments Banks can accept deposits up to Rs 2 lakh per customer but cannot lend. They are remittance and payments platforms with a banking licence — designed for the digital economy, not the credit economy.
On-Tap Licensing: No More Periodic Windows
The August 2016 framework ended the periodic licensing model: RBI releases Guidelines for 'on tap' Licensing of Universal Banks in the Private Sector (PR_37658). Applications can be submitted at any time. The Universal Bank Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) — the November 2025 consolidation of the on-tap framework — specifies:
"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, as desired by the applicant."
Eligible promoters include resident individuals with 10 years of banking experience, entities owned and controlled by residents, and existing NBFCs. Large industrial houses are excluded from direct promotion but can invest up to 10% — because the RBI wanted to prevent connected lending, where an industrial promoter could use a captive bank to fund its own businesses. The minimum initial paid-up capital is Rs 1,000 crore — and the bank must maintain a minimum net worth of Rs 1,000 crore at all times thereafter.
The "fit and proper" criteria are defined in the direction itself. Promoters must demonstrate a track record of sound credentials and integrity, a sound financial position, and no criminal convictions. The process has two stages: RBI screening, followed by assessment by a Standing External Advisory Committee (SEAC) that recommends whether the application merits consideration.
On-tap licensing for SFBs followed in December 2019: RBI releases Guidelines for 'on tap' Licensing of Small Finance Banks (PR_48807). The SFB Licensing Guidelines (Reserve Bank of India (Small Finance Banks – Licen) require a minimum net worth of Rs 500 crore for SFBs seeking to convert from other forms.
The Conversion Pathways
The most significant licensing development since 2020 is not new licences but conversions between bank types:
SFB to Universal Bank: AU Small Finance Bank received in-principle approval in August 2025 to transition to a universal bank — the first institution to use this pathway: RBI grants 'In-principle' Approval to AU Small Finance Bank for transition into a Universal Bank (PR_60977). The SFB Licensing Guidelines provide the conditions: minimum net worth of Rs 1,000 crore, CRAR not less than 15%, net NPAs below 6%, profitable in the preceding two years, and no defaults in CRR/SLR maintenance.
Payments Bank to SFB: Fino Payments Bank received in-principle approval in late 2025 to convert into an SFB: RBI grants 'In-principle' Approval to Fino Payments Bank for conversion into a Small Finance Bank (PR_61762). Existing Payments Banks that have completed five years of operations can apply, provided they meet the SFB licensing conditions.
UCB to SFB: Shivalik Mercantile Co-operative Bank received approval in 2019 to transition into an SFB: RBI grants 'In-principle' Approval to Shivalik Mercantile Co-operative Bank for transition into a Small Finance Bank (PR_49079). This pathway allows well-managed urban co-operative banks to escape the UCB regulatory ceiling and access the broader commercial banking framework. The conversion was triggered by the recognition — sharpened after the PMC Bank failure — that the strongest UCBs needed a viable growth path, while weaker ones needed tighter supervision.
These conversion paths mean the licensing framework is no longer static. An institution can enter as a payments bank, build a deposit base, convert to an SFB, build a lending book, and eventually become a universal bank — each transition requiring fresh RBI approval but following a documented pathway rather than an ad-hoc negotiation.
The 25% Rural Mandate and Branch Geography
The July 2011 unbanked rural branch mandate (RBI/2011-12/113) (since withdrawn) reshaped the physical geography of banking:
"Banks should allocate at least 25 percent of the total number of branches proposed to be opened during a year in unbanked rural centres."
The incentive was direct: for each branch in an underbanked district, the bank received authorisation for a Tier 1 (metropolitan) branch. Want to open in Mumbai? Open in a village first. The December 2009 Tier 3-6 relaxation (RBI/2009-10/243) (since withdrawn) had already freed smaller centres from individual approval:
"Reserve Bank hereby permits domestic scheduled commercial banks to open branches in Tier 3 to Tier 6 centres without having the need to take permission from Reserve Bank in each case."
The May 2017 rationalisation (RBI/2016-17/306) (since withdrawn) completed the arc — general permission for all tiers, with closure protection for rural areas. The Universal Bank Licensing Guidelines now embed the mandate permanently: "The bank shall open at least 25 per cent of its branches in unbanked rural centres to avoid over concentration of their branches in metropolitan areas."
Read the Full Story
- How India Licenses New Banks — from universal to payments to small finance
- What the RBI Looks For When It Licences a New Bank — the criteria behind the decisions, from 1993 to on-tap
Governing Directions: Reserve Bank of India (Universal Banks -- Licensing) Guidelines, 2025 (Reserve Bank of India (Universal Banks – Licensing) | Reserve Bank of India (Small Finance Banks -- Licensing) Guidelines, 2025 (Reserve Bank of India (Small Finance Banks – Licen)
Last updated: April 2026