September 8, 2005
Bhadra 17,1927 (S)
The Chairmen and CEOs of all Scheduled Commercial
Banks
(excluding RRBs)
Dear Sir,
Section 23 of the Banking Regulation Act, 1949
- Liberalised Branch Authorisation Policy
As you are aware, the opening of new and transfer
of existing places of business by the banks is governed by the provisions of
section 23 of the Banking Regulation Act, 1949, while the extant operating instructions
in this regard have been issued vide our Master
Circular on Branch Licensing No.DBOD.BL.BC. 5/22.01.001/2004 dated July 8, 2004.
In terms of the statutory provisions, the banks cannot, without the prior approval
of the RBI, open a new place of business in India or abroad or change, otherwise
than within the same city, town or village, the location of the existing places
of business. Section 23(2) of the B.R. Act lays down that before granting any
permission under this section, the Reserve Bank may require to be satisfied,
by an inspection under section 35 or otherwise, as to the financial condition
and history of the company, the general character of its management, the adequacy
of its capital structure and earning prospects and that public interest will
be served by the opening or, as the case may be, change of location, of the
place of business. Accordingly, the RBI has so far been processing the requests
and granting licenses to banks for each place of business on a case-to-case
basis.
2. While the current policy for authorisation
of overseas branches of Indian banks will continue, it is proposed to liberalise
and rationalise the policy for authorisation of their branches in India. With
this objective, it has been decided to put in place a framework for a branch
authorisation policy which would be consistent with the medium term corporate
strategy of banks and public interest. The new branch authorisation policy framework
would have the elements enumerated in the following paragraphs.
3. As regards the public interest dimensions
of the policy framework, the following aspects would be kept in view in processing
the authorisation requests:
a. The RBI will, while considering applications
for opening branches give weightage to the nature and scope of banking facilities
provided by banks to common persons, particularly in underbanked areas, actual
credit flow to the priority sector, pricing of products and overall efforts
for promoting financial inclusion, including introduction of appropriate new
products and the enhanced use of technology for delivery of banking services.
b. Such an assessment will include policy on
minimum balance requirements and whether depositors have access to minimum banking
or "no frills" banking services, commitment to the basic banking activity
viz., acceptance of deposits and provision of credit and quality of customer
service as, inter alia, evidenced by the number of complaints received
and the redressal mechanism in place in the bank for the purpose.
c. The need to induce enhanced competition in
the banking sector at various locations.
d. Regulatory comfort will also be relevant
in this regard. This would encompass:
- compliance with not only the letter of the regulation but
also whether the bank's activities are in compliance with the spirit and underlying
principles of the regulation.
- the activities of the banking group and the nature of relationship
of the bank with its' subsidiaries, affiliates and associates.
- quality of corporate governance, proper risk management systems
and internal control mechanisms.
4. As regards the procedural aspects, the
existing system of granting authorisations for opening individual branches from
time to time, would be replaced by a system of giving aggregated approvals,
on an annual basis, through a consultative and interactive process. Banks' branch
expansion strategies and plans over the medium term would be discussed by the
RBI with individual banks. The medium term framework and the specific proposals
would, to the extent possible, cover the opening/ closing/ shifting of all categories
of branches/ offices including the ATMs. The authorisations given on an annual
basis would be valid for one year from the date of communication.
5. The above policy parameters will be applicable
to foreign banks, in addition to the criteria which are specific to foreign
banks, as detailed in the revised master circular being issued. While the branch
expansion of foreign banks would be considered keeping in view India’s commitments
at WTO, ATMs will not be included in the number of branches for such computation.
6. All branch authorisation applications
from banks will, henceforth, be examined in detail in the light of the foregoing
policy framework which will be implemented with due flexibility. The proposals
for the one year period, along with the bank's medium term plans, on the lines
indicated above, may be submitted to us at an early date. As a transitional
arrangement, however, it is proposed to consider urgent requests, if any, from
banks for processing their applications already submitted to the RBI and approve
those, on a case-by-case basis, which are considered to be broadly in consonance
with the above policy framework.
7. It is also proposed to rationalise the
extant categories of branches and simplify other procedures relating to authorisation
of branches for which a revised Master Circular on Branch Authorisation is being
issued simultaneously.
Yours faithfully,
( K.J. Udeshi )
Deputy Governor