After years of intense lobbying, business houses wanting to set up banks are spotting a ray of hope. The Reserve Bank of India is slowly opening the doors for corporates to enter the highly-regulated industry, but with caution, conditions and caveats.

In draft guidelines issued on Monday, the banking regulator laid down the broad rules of the game: finance companies can be converted into banks, and promoter groups with "sound credentials and integrity" and a 10-year record of successfully running their businesses can set up banks.

Such banks should have a minimum paid-up capital of Rs 500 crore, run 25% of their branches in rural unbanked regions, list within two years, and be owned by a separate holding company that cannot borrow money to float the bank. Total foreign holding in the bank cannot cross 49% while the operating company must lower its stake to 20% by 10 years.

Corporates may find it easy to meet most conditions, but the RBI has spelt out it will be "very selective" and have the last word. "...it may not be possible to issue licences to all the applicants meeting the eligibility criteria...," said the draft note. A key pre-condition is changes in the Banking Regulation Act to empower the RBI to supersede bank boards and block purchase of 5% or more shares if the investor is not "fit and proper".

India Inc, nonetheless, is excited. Reiterating the Aditya Birla Group's "strong intent to enter banking", Chairman Kumar Mangalam Birla said it was a "forward step" while Bajaj Finserve MD Sanjiv Bajaj said the guidelines were "practical" and "Bajaj Auto and Bajaj Finserve are eligible". A senior Tata Group official said it was a "positive" move.

Even though the financial services business has been a pitfall for several corporate houses in the last two decades, most have harboured hopes of promoting banks. "It's a high-risk business and you have to be paranoid to run it," said Uday Kotak, whose group had received a banking licence in the last round (2003-04). But like others, he too was enthused on Monday: "I hope this bodes well for the government as it plans to move on the reform path."

The RBI, which has had to deal with shady promoters holding benami shares, brokers taking over treasury of small private and co-operative banks, and flamboyant promoters cutting funny deals with diamond merchants to borrow money for the bank, is understandably paranoid.

Under the current norms, promoters will have to declare their source of funds and no single entity or group, other than the operating company, shall have direct or indirect shareholding in excess of 10%. "The draft guidelines reflect the RBI's learnings from bank failures.

For instance, restricting exposures to suppliers and customers of industrial houses where it is a promoter is really seen as a form of connected lending and self-dealing," said H Jayesh, founder partner at law firm JurisCorp.

While corporates will now pressurise the government to amend the BR Act, it will be some time before the RBI issues the first licence. According to Ashvin Parekh, partner, Ernst & Young, "It may be 2-3 years before we see a new bank becoming operational. Diversified ownership and exercise of regulatory control are essential conditions...There have been instances in the past where promoter shareholding was not pared according to plans."

Some aspirants like Religare were confident they would be able to fulfil the RBI's criteria. "Religare Enterprises Limited (REL) is already regulated by the RBI. Besides, they have also separated ownership and management, and today majority of Religare Enterprises' board members are independent of the promoter group and the promoters themselves do not participate at the REL board level," said a Religare spokesperson. (Economic Times)