Section 22 Banking Regulation Act: Bank Licensing and Branch Expansion

No one may carry on banking in India without a licence. That single rule is the gate through which the whole of banking regulation operates, because every other obligation in the Banking Regulation Act attaches to a licensed banking company, and the threat of losing the licence is what makes those obligations enforceable. Section 22 sets out who must have a licence, what the Reserve Bank must satisfy itself of before granting one, and when it may be taken away. Section 23 extends the same control to where a bank may do business.

1. The Requirement of a Licence

Section 22(1), Banking Regulation Act, 1949

Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose.

A prohibition, not a permission: the section is cast as a bar. Banking without a licence is unlawful, and the activity rather than the name of the entity decides whether the bar applies.
Conditional licences: a licence may be issued subject to such conditions as the Reserve Bank may think fit. Conditions on capital, shareholding, branch expansion, priority sector lending and listing are routinely imposed, and breach of a condition is itself a ground of cancellation.
Application (Section 22(2)): a company in existence at the commencement of the Act had to apply within six months, and could continue to do business until its application was disposed of. A company that begins afterwards must obtain the licence before it commences.
Cooperative banks: the requirement applies to them through Section 56, which is why a cooperative society that carries on banking without a licence may be restrained.

2. What the Reserve Bank Must Be Satisfied Of

The conditions the Reserve Bank must be satisfied of

Figure 1: The conditions the Reserve Bank must be satisfied of

Section 22(3) sets out the matters on which the Reserve Bank must be satisfied, if necessary by an inspection of the books, before granting a licence. They are cumulative, and each addresses a different kind of risk.

Present and future solvency: that the company is or will be in a position to pay its present or future depositors in full as their claims accrue.
Conduct of affairs: that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors.
Character of management: that the general character of the proposed management will not be prejudicial to the public interest or the interest of the depositors.
Capital and earnings: that the company has adequate capital structure and earning prospects.
Public interest: that the public interest will be served by the grant of the licence.
Banking structure: that, having regard to the banking facilities available in the proposed principal area of operations, the potential scope for expansion of banks already in existence and other relevant factors, the grant would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth.
Any other condition the fulfilment of which, in the opinion of the Reserve Bank, is necessary to ensure that the carrying on of banking business will not be prejudicial to the public interest or the interests of the depositors.

Foreign companies

Additional conditions (Section 22(3A)): for a company incorporated outside India, the Reserve Bank must also be satisfied that the carrying on of banking business by it in India will be in the public interest, that the government or law of the country of incorporation does not discriminate in any way against banking companies registered in India, and that the company complies with all the provisions of the Act applicable to banking companies incorporated outside India.
Reciprocity: this is the statutory expression of the principle of reciprocity in financial services, and it operates alongside the Bank's policy on branch and subsidiary presence.

3. Refusal, Cancellation and Appeal

Refusal: the Reserve Bank may refuse a licence where it is not satisfied on the matters in sub-sections (3) and (3A). Refusal is an administrative act carrying consequences, so the duty to act fairly and to give reasons attaches to it.
Cancellation (Section 22(4)): the licence may be cancelled where the company ceases to carry on banking business in India, where it at any time fails to comply with any of the conditions imposed under sub-section (1), or where at any time any of the conditions in sub-sections (3) and (3A) is not fulfilled.
Opportunity to comply: before cancelling on the ground of non-fulfilment of a condition, the Reserve Bank must ordinarily give the company an opportunity of taking the necessary steps, unless it considers that delay would be prejudicial to the interests of the company's depositors or the public.
Appeal (Section 22(5) and (6)): a banking company aggrieved by the cancellation may appeal to the Central Government within thirty days from the date on which the decision is communicated. The decision of the Central Government, where an appeal is preferred, or of the Reserve Bank, where none is, is final.
Consequence of cancellation: the company can no longer carry on banking. In practice cancellation is followed by winding up or by a scheme of amalgamation, so it is rarely used except at the end of a failed institution's life.

⚠ Note

The licence is the pivot of banking regulation. Capital requirements, exposure norms, governance standards and conduct rules are imposed partly as conditions of the licence and partly by direction, and the ultimate sanction behind them is the power to cancel. This is why so much of the subject that looks like soft guidance is in fact enforceable: a bank that ignores it risks the one thing without which it cannot exist.

4. The Licensing Policy in Practice

Entry routes and entry capital

Figure 2: Entry routes and entry capital

From stop and go to on tap: licences for new private banks were issued in rounds, in 1993, 2001 and 2013. The Reserve Bank moved to on tap licensing for universal banks by guidelines of 1 August 2016, so that applications may be made at any time.
Universal banks: minimum paid-up voting equity capital of ₹500 crore under the 2016 guidelines, with a non operative financial holding company structure where the promoter is part of a group, promoter shareholding to be brought down over a stated period, and listing within a fixed time. In November 2021 the Reserve Bank accepted a recommendation of its Internal Working Group to raise the initial capital to ₹1,000 crore for universal banks and ₹300 crore for small finance banks, so the current guidelines should be checked for the operative figure.
Small finance banks: on tap guidelines of 5 December 2019, minimum paid-up voting equity capital ₹200 crore, seventy five per cent of adjusted net bank credit to the priority sector, and at least fifty per cent of the loan portfolio in loans up to ₹25 lakh.
Payments banks: guidelines of 2014, minimum capital ₹100 crore, deposits limited per customer and no lending.
Fit and proper: promoters must satisfy the Reserve Bank on integrity, a sound credential and track record of at least ten years, and the soundness and feasibility of the business plan. A Standing External Advisory Committee screens applications.
Corporate houses: the Bank has consistently been reluctant to license large industrial and corporate houses, because of the risk of connected lending and the difficulty of supervising a bank inside a conglomerate.

5. Branch Expansion

The rule (Section 23(1)): no banking company may open a new place of business in India or abroad, or change otherwise than within the same city, town or village the location of an existing place of business, without the prior permission of the Reserve Bank.
Factors (Section 23(2)): before granting permission 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 whether the public interest will be served. Permission may be granted subject to conditions under Section 23(3), and revoked under Section 23(4) for breach of a condition after an opportunity to show cause.
Exceptions: permission is not required for a change of location within the same city, town or village, nor for the opening, for a period not exceeding one month, of a temporary place of business within a city, town or village where the company already has a place of business, on the occasion of an exhibition, a conference or a mela or any similar occasion.
Places of business abroad (Section 23(1)(b)): a banking company incorporated in India also requires permission to open a place of business outside India, or to change the location of one otherwise than within the same city, town or village in that country.
General permission: since 2013 the Reserve Bank has given domestic scheduled commercial banks other than regional rural banks general permission to open banking outlets in Tier 1 to Tier 6 centres under an annual branch expansion plan approved by the board, subject to the condition that at least twenty five per cent of the outlets opened in a financial year are in unbanked rural centres, that is Tier 5 and Tier 6 centres without an existing banking outlet.
Banking outlet: the Bank has redefined a branch as a banking outlet, a fixed point service delivery unit manned by the bank's staff or its business correspondent, open for at least four hours on at least five days a week, which allows business correspondent outlets to count towards the rural requirement.

6. Questions Arising

Is the grant of a banking licence open to judicial review?

Yes, but on narrow grounds. The Reserve Bank is State within Article 12, so a writ lies under Article 226. The matters in Section 22(3) call for an expert and predictive judgment about solvency, management and the structure of the banking system, and courts will not substitute their own assessment. Review is therefore confined to jurisdictional error, mala fides, failure to consider relevant matters and manifest arbitrariness.

Why was a licensing requirement thought necessary at all?

Because the failures of the 1930s and 1940s showed that company law alone could not protect depositors. Anyone could incorporate a company, call it a bank and take money from the public. Licensing imposes a prior check on solvency, management and viability, so that the harm is prevented rather than remedied after a collapse. The number of banking companies fell sharply in the years after the Act came into force, through liquidation and amalgamation, as weak institutions that could not meet the new standards left the field.

⚠ Key point

Section 22(1) forbids any company to carry on banking business in India without a licence from the Reserve Bank, which may be issued subject to such conditions as it thinks fit. Under Section 22(3) the Bank must be satisfied, if necessary by inspection, that the company can pay its depositors in full as claims accrue, that its affairs are not detrimental to depositors, that the general character of the management is acceptable, that it has adequate capital structure and earning prospects, that the public interest will be served, and that the grant would not prejudice the operation and consolidation of the banking system. Section 22(3A) adds non discrimination in the home country for a foreign company. The licence may be cancelled under Section 22(4), with an appeal to the Central Government within thirty days under Section 22(5). Section 23 requires prior permission for a new place of business or a change of location outside the same city, with exceptions for a one month temporary office and a general permission since 2013 conditional on twenty five per cent of new outlets being in unbanked rural centres.

7. Quick Revision

✦ Points worth fixing

Section 22 licenses the bank; Section 23 controls its places of business.

Solvency, conduct, management, capital, public interest and the banking structure, with a residuary power to add conditions, are the matters in Section 22(3).

Thirty days to the Central Government, whose decision is final.

Three grounds of cancellation: ceases to do banking, breaches a licence condition, or a statutory condition is no longer fulfilled.

One month, same city, exhibition or mela. The temporary office exception in Section 23.

One in four in an unbanked rural centre. The price of general permission.

₹500 crore, ₹200 crore and ₹100 crore under the guidelines of 2016, 2019 and 2014 for universal, small finance and payments banks.

The licence is the pivot. Everything else is a condition attached to it.

8. Frequently Asked Questions

Which provision requires a banking licence in India?

Section 22(1) of the Banking Regulation Act, 1949. No company may carry on banking business in India unless it holds a licence issued by the Reserve Bank, and the licence may be issued subject to such conditions as the Bank thinks fit to impose.

On what grounds can the Reserve Bank refuse a banking licence?

Where it is not satisfied on any of the matters in Section 22(3): that the company can pay its depositors in full as their claims accrue, that its affairs are not detrimental to depositors, that the character of the management is acceptable, that its capital structure and earning prospects are adequate, that the public interest will be served, and that the grant will not prejudice the operation and consolidation of the banking system.

Can a banking licence be cancelled, and is there an appeal?

Yes. Under Section 22(4) the Reserve Bank may cancel the licence if the company ceases to carry on banking in India, fails to comply with a condition of the licence, or if a statutory condition is no longer fulfilled. The company must ordinarily be given an opportunity to take corrective steps. An appeal lies to the Central Government within thirty days, and its decision is final.

What is on tap licensing?

A policy under which applications for a bank licence may be made at any time, rather than only during a window opened by the Reserve Bank. It was introduced for universal banks by guidelines of 1 August 2016 and for small finance banks by guidelines of 5 December 2019, replacing the earlier practice of licensing in discrete rounds.

Does a bank need permission to open every branch?

Not any more in the ordinary case. Section 23 still requires prior permission in law, but the Reserve Bank has given domestic scheduled commercial banks other than regional rural banks general permission to open banking outlets in Tier 1 to Tier 6 centres under a board approved annual plan, provided at least twenty five per cent of the outlets opened in a year are in unbanked rural centres.

Does a cooperative society need a banking licence?

Yes, if it carries on banking. Section 56 applies the Act, with modifications, to cooperative banks, so a cooperative society that accepts deposits from the public repayable on demand and withdrawable by cheque must hold a licence under Section 22. A primary agricultural credit society is expressly outside the definition of a cooperative bank and so falls outside the requirement.

What is the difference between a licence under Section 22 and permission under Section 23?

A licence under Section 22 permits the company to carry on banking at all, and without it the business is unlawful. Permission under Section 23 concerns where a licensed bank may do that business, and it is required for each new place of business or a change of location outside the same city, town or village. One goes to existence, the other to geography.

9. Related Topics and Provisions

Meaning of banking, banker and bank
Structure of the Indian banking system
Capital, reserve fund and shareholding in banking companies
Management of banking companies
Inspection, directions and penalties
Priority sector lending