RBI panel moots allowing large corporates to start private banks after amending bank regulation law

The Hindu | 21st November, 2020

An Internal Working Group (IWG) of the Reserve Bank of India (RBI) has recommended raising the cap on promoters’ stake in private sector banks to 26% in the long run (15 years). The holding is currently mandated at 15% of the paid-up voting equity share capital of the bank.

The IWG, set up in June, has also suggested that large corporate or industrial houses be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and non-financial group entities); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.

Also, well-run non-banking financial companies (NBFCs), with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations, meeting due diligence criteria and compliance with additional specified conditions, the panel said.

As regards non-promoter shareholding, it has suggested a uniform cap of 15% of the paid-up voting equity share capital of the bank for all types of shareholders.

The IWG was constituted to review the extant ownership guidelines and corporate structure for private sector banks in India.

The terms of reference of included review of the eligibility criteria for individuals/ entities to apply for banking license; examination of preferred corporate structure for banks and harmonisation of norms; review of norms for long-term shareholding in banks by the promoters and other shareholders.

Conversion to SFB

The panel also recommended that for Payments Banks intending to convert to a Small Finance Bank (SFB), their track record of three years should be considered sufficient and Small Finance Banks and Payments Banks may be listed within ‘6 years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier.

The IWG also suggested that the minimum initial capital requirement for licensing new banks be enhanced from ₹500 crore to ₹1,000 crore for universal banks, and be raised to ₹300 crore from ₹200 crore for SFBs.

It said non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters, promoting entities or converting entities have other group entities, the panel added.

“While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from announcement of tax-neutrality,” the panel has said.

Till the NOFHC structure is made feasible and operational, concerns with regard to banks undertaking different activities through subsidiaries, joint venture and associates need to be addressed through suitable regulations, the panel suggested. It added that banks currently under the NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold.

The group also suggested that the RBI take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. “Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks,” the panel said in its report.

The RBI has sought comments of stakeholders and members of the public, to be submitted by January 15. The RBI said it would examine the comments and suggestions before taking a view in the matter.

Commenting on the recommendations, Rajesh N. Gupta managing partner, SNG & Partners said, “It is a welcome idea to boost economic activity, job creation enhancing liquidity.”

“However, the recent failures on internal and external controls like in the case of PNB leading to an alarming fraud; the failures of bank and NBFCs like LVB, ILFS, DHL where all stakeholders lost money and credibility requires very high degree of supervisory mechanism and corporate governance which has strong IT and AI-enabled platform,” he said.

“Where corporate house is a promoter, strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential. Fit and proper criterion needs to be fool proof. Biggest may become bigger but the beneficiary should include the common citizen,” he added.

Mr. Gupta said each year the banking industry has seen more NPAs and frauds so there are compelling reasons to overcome this hurdle.