RBI to Allow Large Business Houses to Launch Bank

Reading Time: 6 minutes

RBI’s Good News for Large Corporates/ Business Houses


According to the RBI’s recent Internal Working Group Report, RBI to Allow Large Business Houses to Launch Bank in India. RBI’s earlier conservative approach, towards the big corporates to set up new private banks, is seen to be changing.

On November 20, 2020, RBI released the Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks. In this article, we are going to discuss the key proposals of RBI mentioned in the report.

Stock O Meter
Stock O Meter – A Complete Equity Research Tool by Invest Yadnya

RBI to Allow Large Business Houses to Launch Bank

A Quick Overview of Indian Banking Sector

  • Banking Sector is a vital cog of any healthy economy. Prior to Nationalization of Banks, Indian Banking sector had been organised in private sector.
  • Since liberalization, RBI has issued bank licences in 3 Rounds :
    1. Round I in 1993-94 :
      • RBI gave licences to 10 private sector banks
    2. Round II in 2003-04 :
    3. Round III in 2013-14 :

RBI’s Conservative Approach towards Large Business Houses to Set up Bank

  • In the past, the RBI has been largely hesitant to let large businesses promote banks.
  • During 2013-14 in Round III of issuance of Banking License, RBI had permitted corporate houses to apply & according invited their applications for New Private Banks.
  • Many Large Corporates had applied for permits in 2013-14 : Tata Sons, Aditya Birla Nuvo, L&T Finance Holdings, Reliance Capital, INMACS Management Services (a Leading Chartered Accountant Firm in Gurgaon).
  • But, RBI turned down their applications & preferred financial institutions which had experience in banking transactions.
  • Accordingly, Only 2 institutions : Bandhan & IDFC got Banking licenses in Round III in 2013-14.

Why RBI should let Business Houses to Set up & Run Banks in India?

  1. Weaker Credit Diffusion in India
    • India’s Credit-to-GDP Ratio is around 57.8% as on FY20, much less as compared to global peers (China : 150-200%).
    • The Ratio is expected to remained subdued in FY21 led by COVID pandemic.
    • India needs more banks albeit with better regulation for sustaining high growth and doubling the Credit-to-GDP ratio to 100%, RBI board member Mr. Manish Sabharwal said on (Sept 8, 2020).
  2. Frauds in PSU Banks
    • Frauds in government-owned banks have been rising much faster than their assets and Profits.
    • In any case, public sector banks had negative returns on equity and assets in 2017-18 and 2018-19.
    • One of the reasons for the failure of demonetization to unearth unaccounted wealth was the nexus between banks and clients. This problem was concentrated in public sector banks.
  3. Encouraging/ Inviting More Private Capital into the Banking System 
    • Capital-intensive industry needs players who can invest large amounts of capital. 
    • Government finances are not meant to provide capital for commercial enterprises. It only encourages political and executive interference in commercial decision-making.
    • It would give rise to conflicts of interest that central bank regulations can do little about, whereas inviting private capital addresses the problem.
Also Read on FinMedium:  How to analyse an IPO?
Model Portfolios by Invest Yadnya
Model Portfolios by Invest Yadnya

RBI’s Approach is ChangingRBI to Allow Large Business Houses to Launch Bank

Good News of RBI for Large Corporates/ Business Houses

  • On November 20, 2020, RBI released the Report of the Internal Working Group  (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks.
  • Key Points included in IWG Report :
    • Review of the eligibility criteria for individuals/ entities to apply for banking license
    • Examination of preferred corporate structure for banks and harmonisation of norms in this regard
    • Review of norms for long-term shareholding in banks by the promoters and other shareholders
1. Eligibility Criteria for Promoters
  • Large corporate/Business houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949.
  • This is mainly aimed at 2 Objectives :
    • Preventing connected lending and exposures between the banks and other financial and non-financial group entities
    • Strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision
  • Eligibility Criteria for NBFCs for conversion into banks :  
    1. Well run large NBFCs, with an Asset Size of Rs.50,000 Cr and above
    2. This includes NBFCs which are owned by a corporate house
    3. Respective NBFC should complete 10 years of operations Should meet Due Diligence criteria & satisfy other additional conditions
    4. For Payments Banks intending to convert to a Small Finance Bank, A Track record of 3 years of experience as Payments Bank may be sufficient
Also Read on FinMedium:  Is Everyone Making Money Except You? : The Prudent Investor
2. Criteria Regarding Promoters’ Shareholding & Voting Rights
  • Lock-in Period for Promoters’ Initial Shareholding :
    • No Change in Promoter’s Initial Lock-in Requirement, It would continue as Minimum 40% of paid-up voting equity share capital of the bank for first 5 years
  • Cap on Promoter’s Stake in the Long-run (15 years) :
    • May be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank
    • Promoter, if desired can bring down the holding even below 26% anytime after the lock-in period of 5 years
  • No intermediate sub-targets Dilution between 5-15 years may be required
    • However, at the time of issue of licences, the promoters may submit a dilution schedule which may be examined and approved by the Reserve Bank.
  • As regards non-promoter shareholding, a uniform cap of 15% of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders
3. Criteria Regarding Pledging of Shares
  • Pledge of shares by promoters during the lock-in period, which amounts to bringing the unencumbered promoters’ shares below the prescribed minimum threshold, should be disallowed.
  • In case invoking the pledge results in purchase/transfer of shares of such bank beyond 5% of the total shareholding of the bank, without prior approval of RBI.
  • RBI may restrict the voting rights of such pledgee till the pledgee applies to Reserve Bank for regularization of acquisition of these shares.
  • RBI may introduce a reporting mechanism for pledging of shares by promoters of private sector banks.
4. Criteria Regarding Minimum Initial Capital Requirement
  • The minimum initial capital requirement for licensing new banks should be enhanced :
    1. Universal banks : From Rs.500 Cr to Rs.1000 Cr
    2. Small Finance banks : From Rs.200 Cr to Rs.300 Cr
    3. For UCBs (Urban Co-operative Banks) transiting to Small Finance Banks : Minimum initial capital requirement should be Rs.150 Cr and which has to be increased to Rs.300 Cr in 5 years
Also Read on FinMedium:  Amazon Stock Analysis - Yadnya Investment Academy
5. RBI’s Focus on NOFHCs
  • RBI’s IWG group has put lot of emphasis on the Non-operative Financial Holding Company (NOFHC) model.
  • NOFHCs 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.
  • 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.
  • 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.
  • 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.

Source link

Disclaimer: The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of the FinMedium or its members. The presentation of material therein does not imply the expression of any opinion whatsoever on the part of the FinMedium concerning the legal status of any company, country, area, or territory or of its authorities. For more info. please read our ToU & Privacy Policy here. If you have any concerns regarding this post, please reach out to our grievance officer Ghanisht Nagpal and drop a mail to editor@finmedium.com

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Invest Yadnya

Invest Yadnya

Yadnya Investment Academy focuses on Investor Education, Personal Finance, Money Ideas, Mutual Funds, Stock Market, Investing, and Savings.
Please Share Now :)