In April 2014, the Reserve Bank of India announced that it would grant banking licences to exactly two applicants out of twenty-five that had applied. Bandhan Financial Services and IDFC Limited would become banks. The other twenty-three — including industrial conglomerates, real estate firms, and large NBFCs — were rejected. The in-principle approval announcement (PR_30931) did not explain why each rejected applicant failed. The RBI never does. But the guidelines it published — the criteria it told applicants it would evaluate — reveal exactly what the central bank considers when deciding who gets to be a bank.
The answer is not simply "money." Capital is necessary but insufficient. What the RBI looks for is a combination of financial strength, governance credibility, business plan viability, and — critically — a reason for the bank to exist. The RBI does not want more banks for the sake of competition. It wants banks that serve a purpose the existing system does not adequately serve.
See also: Licensing & Authorization: The Complete Timeline | How India Licences New Banks: From Universal to Payments to Small Finance
What is the "fit and proper" test — and why does it exist?
The foundational concept in RBI licensing is "fit and proper." The phrase appears throughout Indian banking regulation — in director appointment criteria, in promoter evaluation, in the assessment of controlling shareholders. The June 2004 circular on Fit and Proper Criteria for Directors of Banks (Fit and proper criteria for directors of banks) (since withdrawn) established the principle for existing banks. The May 2011 update on Fit and Proper Criteria for Directors RBI/2010-11/541 (since withdrawn) refined it. The Master Direction on Fit and Proper Criteria for Elected Directors (Master Direction - Reserve Bank of India (‘Fit and) (since withdrawn) consolidated the framework.
For new bank licences, "fit and proper" means the RBI examines the promoter's personal and professional track record. Has the promoter been involved in any financial irregularity? Is there a criminal case pending? Has any entity controlled by the promoter been penalised by a regulator? Is the promoter's source of capital clean and traceable?
"Banks should undertake a process of due diligence in determining the 'fit and proper' status of the persons to be elected as directors on their Boards." — Fit and Proper Criteria for Directors, June 2004 (Fit and proper criteria for directors of banks) (since withdrawn)
Why does this test exist? Because banking is fundamentally a trust business. A bank takes deposits from the public — money that belongs to ordinary citizens — and deploys it through lending. A bad promoter can destroy depositor savings through self-dealing, related-party lending, or simple mismanagement. The history of Indian banking is littered with examples: from the PMC Bank fraud to cooperative bank collapses driven by promoter malfeasance. The fit and proper test is the RBI's first line of defence against giving the licence to someone who will abuse it.
What are the capital requirements — and why do they differ by bank type?
The November 2025 Universal Banks — Licensing Guidelines (Reserve Bank of India (Universal Banks – Licensing) consolidated the capital framework for new universal bank licences. The minimum capital requirement for a new universal bank is Rs 1,000 crore. For a Small Finance Bank, it is Rs 200 crore. For a Payments Bank, it is Rs 100 crore.
Why the tiered thresholds? Because different bank types carry different risk profiles. A universal bank can do everything — accept all types of deposits, lend to corporates and retail borrowers, deal in forex, issue letters of credit, trade in government securities. The capital buffer must be proportionate to the range and scale of risks. A Payments Bank, by contrast, cannot lend at all — its deposits are capped, and its funds are deployed only in government securities and bank deposits. The risk is structurally lower, so the capital requirement is lower.
The Operating Guidelines for Small Finance Banks RBI/2016-17/81 (since withdrawn) issued in October 2016 specified the operational framework for SFBs post-licence. The Operating Guidelines for Payments Banks RBI/2016-17/80 (since withdrawn) did the same for Payments Banks. Both documents reveal not just what these banks can do, but what they cannot — and the constraints are deliberate.
"Operating Guidelines for Small Finance Banks." — SFB Operating Guidelines, October 2016 RBI/2016-17/81 (since withdrawn)
Capital alone does not get you a licence. It gets you past the first filter. The applicants rejected in the 2013-14 licensing round included entities with balance sheets many times the Rs 500 crore minimum (the threshold at the time). They had the money. They did not have something else the RBI was looking for.
What does the RBI scrutinise in the business plan?
The RBI does not just check whether you can be a bank. It checks whether you should be a bank. The business plan evaluation asks: what will this bank do that existing banks are not doing? Who will it serve? How will it achieve financial viability while fulfilling the social obligations that come with a banking licence?
Bandhan Financial Services got licensed because it had a proven track record in microfinance — serving millions of borrowers in eastern India that commercial banks had not reached. IDFC Limited got licensed because it had expertise in infrastructure financing — a sector that needed long-term credit that existing banks were not adequately providing. Both applicants answered the question: why should this bank exist?
The RBI Discussion Paper on Entry of New Banks in the Private Sector (PR_22964) released in September 2010 outlined the policy considerations. The Draft Guidelines for Licensing of New Banks (PR_24975) in October 2011 specified the evaluation criteria. The Final Guidelines (PR_28191) in February 2013 opened the application window. The clarifications posted on the RBI website (PR_28272) addressed queries from prospective applicants.
"RBI releases Guidelines for Licensing of New Banks in the Private Sector." — New Bank Licensing Guidelines, February 2013 (PR_28191)
Why does the RBI evaluate the business plan rather than simply licensing anyone who meets the capital threshold? Because India already has enough banks in aggregate. What it does not have is enough banks serving specific populations and geographies. The licensing process is not a market entry mechanism — it is a resource allocation mechanism. The RBI allocates the privilege of accepting public deposits to entities that it believes will use those deposits productively and safely.
What obligations come with the licence — and why 25% rural branches?
A banking licence is not a commercial permit. It comes with social obligations embedded in the regulatory framework. The most significant: 25% of new branches must be opened in unbanked rural centres — villages with a population below 10,000 that have no existing bank branch.
The July 2011 branch licensing circular RBI/2011-12/113 (since withdrawn) mandated this for all banks. But for newly licensed banks, the obligation is particularly binding because they are building their branch network from scratch. An existing bank with 4,000 branches can satisfy the 25% requirement by adding a few hundred rural branches. A new bank with zero branches must plan its entire expansion around this ratio from day one.
The May 2017 Branch Authorisation Rationalisation RBI/2016-17/306 (since withdrawn) gave banks general permission to open branches almost anywhere — but the rural obligation remained. The SFB compendium on Financial Inclusion and Development RBI/2017-18/14 issued in July 2017 specifically directed Small Finance Banks to ensure inclusion remained central to their branch strategy.
Why does the RBI impose geographic obligations on a commercial licence? Because without the mandate, rational economics would drive every new bank to open in Mumbai, Delhi, Bangalore, and Hyderabad — where the deposits are large, the infrastructure exists, and the operating costs are low. The rural mandate forces banks to internalise the cost of financial inclusion as a condition of the privilege of accepting public deposits.
What happens when applicants get rejected — and why is the process opaque?
The RBI does not publicly explain why individual applicants are rejected. When 25 entities applied for universal bank licences in 2013 and only 2 were approved, the other 23 received no published reasons. The names of applicants were disclosed (PR_29505). Tata Sons withdrew its application (PR_30066). But the evaluation reasoning remained internal.
Why the opacity? Two reasons. First, the RBI wants to avoid litigation. If it publicly states that an applicant's promoter was found unfit, the promoter could challenge the assessment in court, creating years of litigation that would paralyse the licensing process. Second, the evaluation involves confidential information — intelligence inputs, regulatory coordination with other agencies, assessments of business viability that the applicant would not want publicly discussed.
The same pattern applied to the Small Finance Bank and Payments Bank licensing rounds. The RBI granted in-principle approval to 10 SFB applicants (PR_35010) and 11 Payments Bank applicants (PR_34754) in 2015. The Guidelines for Licensing of Small Finance Banks (PR_32614) and Guidelines for Licensing of Payments Banks (PR_32615) had been released in January 2015. The Draft Guidelines (PR_31646) had been published for public comment in August 2014. The process was transparent in its criteria but opaque in its application.
"RBI grants 'In-principle' Approval to 10 Applicants for Small Finance Banks." — SFB In-principle Approval, 2015 (PR_35010)
Not all licensed entities succeeded. The Liquidation of Aditya Birla Idea Payments Bank RBI/2019-20/99 in November 2019 and the Cessation of Aditya Birla Idea Payments Bank RBI/2020-21/32 in September 2020 showed that even a licence from the RBI does not guarantee commercial viability. The Payments Bank model proved unworkable for some licensees — the restrictions on lending and deposit caps made the business unprofitable.
How does the regulatory ladder work — from Payments Bank to SFB to Universal Bank?
The most recent evolution in licensing philosophy is the concept of graduated conversion. Instead of jumping directly to a universal bank licence, an entity can start as a Payments Bank, prove itself, convert to a Small Finance Bank, prove itself again, and eventually apply for a universal bank licence.
The Voluntary Transition of UCBs into Small Finance Banks RBI/2018-19/52 established the principle for cooperative banks. The UCB licensing (PR_23237) framework had long been separate from the commercial bank licensing process. But the conversion pathway now allows entities to move between categories.
The in-principle approval to AU Small Finance Bank for transition to a Universal Bank (PR_60977) — the first SFB-to-universal conversion — validated the ladder. The in-principle approval to Fino Payments Bank for conversion to an SFB (PR_61762) validated it from the other end. The in-principle approval to Shivalik Mercantile Cooperative Bank for SFB conversion (PR_49079) showed that even cooperative banks could climb the ladder.
"RBI grants 'In-principle' Approval to AU Small Finance Bank Limited for transition into a Universal Bank." — AU SFB Universal Bank Approval (PR_60977)
Why does the ladder matter? Because it reduces the stakes of the initial licensing decision. Instead of the RBI making a binary, irreversible judgment about whether an entity can be a universal bank, it can grant a limited licence — lower capital, lower risk, narrower scope — and observe performance. If the entity proves its governance, its risk management, and its commercial viability, it can graduate upward. If it fails, the damage is contained to a smaller institution.
The Technical Paper on Differentiated Bank Licences (PR_16669) that the RBI released as early as April 2007 had anticipated this direction. The on-tap licensing framework — where applications are accepted year-round instead of in periodic windows — completed the shift. The Licensing as Authorised Dealer Category II RBI/2018-19/170 showed that the licensing philosophy extends beyond deposit-taking banks to the broader financial system.
The RBI's licensing framework in 2026 is a far more sophisticated instrument than the periodic licensing rounds of the 1990s and 2000s. It is graduated, continuous, and — through the fit and proper test, the capital thresholds, the business plan scrutiny, and the social obligations — designed to ensure that the privilege of accepting public deposits goes only to entities the RBI believes will use it responsibly.
Last updated: April 2026