How to Start a Bank in India: RBI Licence, Capital and Legal Requirements
Starting a bank in India is not an ordinary company-registration exercise. A company cannot carry on banking business without a licence from the Reserve Bank of India. New private-sector universal banks are considered under the RBI's on-tap licensing framework together with the Banking Regulation Act, 1949 and other applicable banking, company, foreign-investment, governance, prudential, KYC and consumer-protection rules.
What is banking under Indian law?
Section 5(b) of the Banking Regulation Act, 1949 defines "banking" as accepting deposits of money from the public for the purpose of lending or investment, where those deposits are repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Section 5(c) defines a "banking company" as a company which transacts the business of banking in India.
This legal definition is important. A lending company, fintech platform or other financial-services business does not become a bank merely because it provides loans or payment-related technology. Banking business involving public deposits is subject to the banking-licensing framework.
Section 22: RBI banking licence is mandatory
Section 22(1) of the Banking Regulation Act provides that no company may carry on banking business in India unless it holds a licence issued by the RBI. The RBI may impose conditions on a licence. A proposed bank therefore requires regulatory approval before commencing banking business; incorporation of a company by itself does not authorise banking.
The official starting point for regulatory information is the Reserve Bank of India. RBI's on-tap licensing guidelines for universal banks establish the principal entry framework for new universal banks in the private sector, as modified by subsequent regulatory requirements.
Minimum capital for a new bank
| Bank category | Current entry capital/net worth | Regulatory route |
|---|---|---|
| Universal Bank | Rs. 1,000 crore | RBI on-tap universal-bank licensing framework and applicable directions |
| Small Finance Bank | Rs. 300 crore | RBI on-tap SFB licensing framework and applicable directions |
Capital is only an entry condition. Merely arranging the minimum capital does not create a right to receive a banking licence. RBI examines the promoters, ownership, source of funds, business plan, governance, financial soundness, group structure, integrity, experience, public interest and the bank's ability to comply with prudential regulation.
Who can promote a universal bank?
Under the on-tap framework, eligible promoters include resident individuals and professionals with substantial senior-level banking and finance experience, and specified resident-owned and controlled entities or groups with a successful track record, subject to RBI's detailed eligibility and "fit and proper" assessment. The 2016 framework states that resident individuals and professionals should have at least 10 years of experience in banking and finance at a senior level.
Large industrial or business houses are not eligible promoters of new universal banks under the on-tap framework, although investment in banks is governed separately by applicable shareholding and acquisition rules. Applicants must review the latest RBI directions because ownership limits and prior-approval requirements operate independently of basic promoter eligibility.
NOFHC and group structure
A Non-Operative Financial Holding Company, or NOFHC, is a holding structure used to ring-fence regulated financial businesses from other activities in a promoter group. Under the on-tap universal-bank framework, an NOFHC is required where the individual promoter or promoting/converting entity has other group entities. It is not mandatory in the same way for an individual promoter or standalone promoting/converting entity without other group entities, subject to the applicable RBI framework.
Where an NOFHC is required, its ownership, governance, regulated subsidiaries and permissible activities must satisfy RBI requirements. A proposed group should therefore map its entire corporate and financial-services structure before applying.
Promoter holding, ownership and control
Bank ownership is subject to strict regulatory control. The original on-tap framework prescribed a minimum promoter/promoter-group or NOFHC holding of 40 percent of paid-up voting equity capital with a five-year lock-in. Ownership and voting rights are also governed by later RBI directions, including the RBI framework for acquisition and holding of shares or voting rights in banking companies, as amended from time to time.
Applicants and investors should not rely on historic dilution percentages without checking the latest directions and the specific licensing conditions imposed by RBI.
How the bank licensing process works
- Choose the appropriate banking model, such as a universal bank or small finance bank, and confirm that the promoters satisfy the relevant eligibility rules.
- Establish a legally compliant promoter and group structure, including an NOFHC where required.
- Arrange qualifying capital from transparent and acceptable sources and document the source of funds.
- Prepare a detailed business plan covering products, deposits, lending, financial inclusion, branch and digital strategy, risk management, governance, technology, cyber security, compliance and projected financials.
- Demonstrate that promoters, significant shareholders, directors and proposed senior management satisfy applicable fit-and-proper standards.
- Submit the prescribed application and supporting documents to RBI under the applicable licensing framework.
- If RBI grants in-principle approval, complete the required corporate, capital, systems, governance and operational arrangements within the period and conditions specified by RBI.
- Obtain the final banking licence and satisfy all commencement conditions before accepting deposits or conducting banking business.
What business can a bank conduct?
The Banking Regulation Act specifies forms of business in which banking companies may engage, subject to RBI regulation and other applicable laws. Depending on its licence and approvals, banking operations may include accepting deposits, maintaining bank accounts, lending and advances, payment services, dealing in permitted foreign exchange and securities, and distributing or undertaking other permitted financial products and services.
Foreign-exchange activity is separately regulated under the Foreign Exchange Management Act and RBI authorisation. Securities, insurance, mutual-fund and other financial activities may also involve separate regulatory conditions and cannot be assumed to be unrestricted merely because an entity has a banking licence.
Major continuing compliance areas
- Minimum capital and capital-adequacy requirements.
- Liquidity, exposure, asset classification and provisioning norms.
- Corporate governance and fit-and-proper requirements for directors and senior management.
- KYC, customer due diligence and anti-money-laundering obligations.
- Priority-sector lending and financial-inclusion requirements where applicable.
- Information technology, cyber security, operational resilience and fraud-risk controls.
- Customer service, grievance redress and RBI Ombudsman requirements.
- Related-party and group exposure restrictions.
- Statutory audit, regulatory reporting and supervisory inspection.
- Deposit insurance requirements applicable to licensed banks.
Deposit insurance
Licensed commercial and co-operative banks covered by the statutory scheme are registered with the Deposit Insurance and Credit Guarantee Corporation. The DICGC administers deposit insurance in India. Deposit insurance is a protection for eligible bank depositors; it is not a substitute for the RBI licensing, prudential and supervisory requirements applicable to the bank itself.
Universal bank, small finance bank, NBFC or fintech?
Entrepreneurs should identify the regulated activity before selecting a structure. A universal bank has a broad banking mandate but faces the highest entry and continuing regulatory requirements. A small finance bank is a licensed bank designed around financial inclusion and specified lending requirements. An NBFC may undertake permitted financial activities under RBI registration and regulation but is not a banking company and cannot present itself as a bank or conduct banking business merely by incorporating a finance company. A fintech may provide technology or regulated services depending on its model, but technology alone does not confer a banking licence.
Current position at a glance
| Issue | Current position |
|---|---|
| Can an ordinary company accept public deposits and operate as a bank? | No. Section 22 requires an RBI banking licence. |
| New universal-bank entry capital/net worth | Rs. 1,000 crore under RBI's current handbook. |
| New small finance bank entry capital/net worth | Rs. 300 crore under RBI's current handbook. |
| Is minimum capital enough to obtain a licence? | No. RBI conducts extensive eligibility, fit-and-proper, ownership, governance and business-plan assessment. |
| Can a large industrial house promote a new universal bank? | Not under the current on-tap universal-bank promoter eligibility framework. |
| Is an NOFHC always mandatory? | It is required in specified group structures; the 2016 framework makes it non-mandatory for certain individual or standalone promoters without other group entities. |