Raise promoters’ stake in private banks: RBI’s internal working group

An Internal Working Group (IWG) of Reserve Bank of India suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949. The committee was formed by the banking regulator in June to review extant ownership guidelines and corporate structure for Indian private sector banks. “The terms of reference of the IWG inter alia included a review of the eligibility criteria for individuals/entities to apply for banking license; examination of preferred corporate structure for banks and harmonization of norms in this regard; and review of norms for a long-term shareholding in banks by the promoters and other shareholders,” the Banking Regulator said.

The report of IWG is placed on the RBI website for comments, which would further be examined by the central bank before coming to a conclusion.

The following are the recommendations/suggestions made by the IWG

 The group suggested that the cap on promoters’ stake in private banks may be raised from the existing 15 per cent to 26 per cent of paid-up voting equity share capital in the long run. The group also recommended a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank for all non-promoter shareholders.

“Large corporate/industrial houses may 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,” the committee suggested. Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks, it said. “However, it should be mandatory only in cases where the individual promoters/promoting entities/ converting entities have other group entities,” it added.

The committee also suggested that the banks currently under NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold. While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status. These banks then should move to the NOFHC structure within 5 years from announcement of tax-neutrality.

The internal working group also recommended that well-run large Non-banking Finance Companies (NBFCs), with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks. These conversions shall be done if NBFCs complete 10 years of operations and meet due diligence criteria and compliance with additional specified conditions.

One more recommendation of the group was provisions for payments banks intending to convert to small finance banks. IWG said that a track record of three years of experience as payments banks may be considered sufficient. Further, small finance banks and payments banks may be listed within six 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.

Further, the committee recommended doubling the minimum initial capital requirement for licensing new banks from present Rs 500 crore to Rs 1,000 crore for universal banks and raising the initial capital requirement from Rs 200 crore to Rs 300 crore for small finance banks. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefits should be given to existing banks, the report added.