RBI Committee Recommends Large Corporate-backed Private Banks; Increase in Bank Promoters' Stake to 26%
An internal working committee set up by the Reserve Bank of India (RBI) has recommended path-breaking reforms in the Indian banking sector, including participation of large Indian corporates and industrial houses as promoters of banks. The committee headed by PK Mohanty also suggested to increase in promoters' stake to 26% after a lock in period of five years.
"Large corporate or industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act to deal with 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 says in its recommendations. RBI has published the committee report on its website.
The PK Mohanty-headed working group was set up in June this year to examine and review the extant licensing and regulatory guidelines relating to ownership and control, and corporate structure of Indian private sector banks.
In its report, the working group has also batted for conversion of well-run large non-banking finance companies (NBFCs) with an asset size of Rs50,000 crore and above and including those which are owned by a corporate house, into banks, provided they have completed 10 years of operations and meet the due diligence criteria and satisfy other additional conditions.
With regard to the complex ownership structure that is in place for the banking sector in India, the working group has recommended a more liberal structure that allows promoters to hold higher shareholding in private banks.
It has suggested that while the initial five-year lock-in period for promoter shareholding in banks with a minimum holding of 40% of the paid-up voting equity share capital may continue, the cap on promoters' stake in the long run of 15 years may be raised to 26% from the current levels of 15%.
"This stipulation (26% shareholding) should be uniform for all types of promoters and would mean that promoters, who have already diluted their holdings to below 26%, will be permitted to raise it to 26% of the paid-up voting equity share capital of the bank. The promoter, if he/she so desires, can choose to bring down holding to even below 26%, any time after the lock-in period of five years," the committee has said in its report.
As per the current regulations, promoters of banks have to reduce their shareholding to 15% level.
The suggestion from the working group, to allow corporates and industrial houses become promoters of banks is in line with evolving thinking that a liberal ownership structure, backed by strong regulation, and may help expanding banking services in the country while getting the requisite investment from the corporate sector.
So far, RBI had remained reluctant to permit large corporate houses to promote banks as such a structure is seen to hamper free and fair operations of the banks while presenting a case for conflict of interest.
The NITI Aayog, on the other hand, had recently recommended to the government that long-term private capital should be allowed into the banking sector. It also suggested giving banking licences to select industrial houses.
To provide further flexibility to promoters of private banks, the committee has said that no intermediate sub-targets between 5 and 15 years may be required for reduction in shareholding.
"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. The progress in achieving these agreed milestones must be periodically reported by the banks and shall be monitored by the Reserve Bank," the committee said.
Here are the key recommendations made by the Mohanty committee...
• The cap on promoters’ 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.
• 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.
• 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.
• Well-run large non-banking Finance Companies (NBFCs), with an asset size of Rs50,000 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.
• 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.
• 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.
• The minimum initial capital requirement for licensing new banks should be enhanced from Rs500 crore to Rs1,000 crore for universal banks, and from Rs200 crore to Rs300 crore for small finance banks.
• Non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new licences 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 five 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.
• RBI 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.