New Delhi: A recent bust in Karnal, Haryana, has exposed a fraudulent syndicate operating a fake “PNL Bank” that swindled crores by promising to double investors’ money within 26 months.
This incident has raised important questions about how legitimate banks are established in India, who is eligible to open them, and the regulatory framework governing the sector.
In India, the Reserve Bank of India (RBI) is the sole regulator responsible for licensing and overseeing banks. To open a commercial bank, entities must obtain an RBI license and adhere to the Banking Regulation Act of 1949 and other prescribed guidelines. Issued guidelines in 2013 outline strict norms to protect depositors’ money and prevent the concentration of economic power.
Only Indian nationals or professional entities with at least 10 years of experience in banking or finance can apply for a banking license. Additionally, any private sector entity or group must be predominantly owned by Indian residents and possess a minimum net worth of ₹5,000 crore (50 billion rupees). Large industrial houses are barred from launching new banks to avoid economic concentration but may invest up to 10% in new banks.
Key conditions for bank promoters include maintaining at least 40% paid-up equity for the first five years, which can reduce to 15% within 15 years. A minimum paid-up voting equity capital of ₹500 crore (five billion rupees) is mandatory for new banks. Foreign direct investment (FDI) limits up to 75% are applicable as per India’s FDI policy in banking.
New banks are required to open at least 25% of their branches in unbanked rural areas and meet lending targets to priority sectors. Within six years of starting operations, banks must get listed on stock exchanges.
Banks in India are categorized by function and ownership. The RBI functions as the central bank, overseeing various types such as cooperative banks, commercial banks (public sector, private sector, foreign), regional rural banks, local area banks, specialised banks, small finance banks, and payments banks.
Cooperative banks operate under state laws, focusing on agricultural and short-term loans for social welfare. Commercial banks follow the Companies Act, 1956, divided into public sector banks predominantly government-owned, private sector banks owned by private entities, and foreign banks headquartered abroad.
Regional rural banks cater to agricultural and rural lending as joint ventures between the central government, state government, and commercial banks. Local area banks, started in 1996, are private sector entities aimed at niche markets, mostly found in South India.
Specialised banks target specific sectors like small industries, exports-imports, or agriculture development. Small finance banks provide microfinance and loans to underserved sections under RBI supervision. Payments banks, a new concept, allow deposits up to ₹1 lakh but do not offer credit facilities, with prominent players including Airtel Payments Bank and India Post Payments Bank.
This regulatory landscape ensures banking safety, promotes financial inclusion, and safeguards public interest.