RBI report on private sector banks’ ownership

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RBI report on private sector banks’ ownership

The RBI had constituted an internal working group (IWG) on June 12 to review extant ownership guidelines and corporate structure of Indian private sector banks. Terms of reference included review of the eligibility criteria for individuals/entities to apply for banking license; examination of preferred corporate structure for banks and, review of norms for long-term shareholding in banks by promoters and other shareholders. These steps are progressive for the sector in the long-term. It will boost economic activity and enhancing liquidity.

The IWG has since submitted its report. The key recommendations of the IWG are:

1.The cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank. As regards non-promoter shareholding, a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders.

Currently, banking regulations make it mandatory for promoters of private sector banks to reduce their ownership to 40% within three years and to 15% in 15 years. It would bring criteria for other banks at par with Kotak Mahindra Bank that was given an exception. The exception had happened even as smaller lender Bandhan Bank was penalised for not bringing down the stake. This move would be positive for IndusInd Bank as the promoter was looking to increase its current stake from 14.7% but was unable to do so due to regulations.

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2. 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.

Large groups like Reliance, Tata, Birla may enter the banking space. However, changes in banking regulation act and other procedural things may require time. Strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential. The ultimate power of fit and proper criteria and due diligence rests with RBI.

3. 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 subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.

This is an opportunity for NBFCs to apply for the banking licence, positive for companies like Bajaj Finance, M&M Finance, Shriram Transport and L&T Finance. Ultimately it would increase healthy competition, making the banking system more efficient.

4. For Payments Banks intending to convert to a Small Finance Bank, track record of 3 years of experience as Payments Bank may be considered as sufficient.

A move which could open up new avenues for a handful of such entities including those promoted by Paytm, Fino, and Bharti Airtel.

5. 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.

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6. The minimum initial capital requirement for licensing new banks should be enhanced from Rs.500 crore to Rs.1000 crore for universal banks, and from Rs.200 crore to Rs.300 crore for small finance banks. Increasing capital requirement will act as an entry barrier.

7. 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/ converting entities have other group entities.

8. 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.

This would require amendments in the Income Tax Act as NOFHC structure to attain tax neutrality would require, hence will take time.

9. Till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries/ Joint Ventures/ associates need to be addressed through suitable regulations.

10. 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.

Equitas SFB, AU SFB, Ujjivan SFB and Bandhan Bank would have upper hand as they can roll bank into a single entity and can get away with holding company.

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11. Reserve Bank may 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.

Each year the banking industry has seen more NPAs and frauds so these are compelling reasons to overcome this hurdle. RBI has sought comments on the draft report put up for comments by 15 January 2021.

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