RBI’s internal working group has proposed to allow well-run large non-banking Finance Companies (NBFCs) to be converted into banks.

RBI proposes overhaul of banking sectorImage Credit: Picxy.com/pankaj22
Money Banking Friday, November 20, 2020 - 20:22

The Reserve Bank of India's internal working committee has recommended path-breaking reforms in the Indian banking sector, calling for participation of large Indian corporates and industrial house as promoters of banks. The P.K. Mohanty-headed working group was set up in June to examine and review the extant licensing and regulatory guidelines relating to ownership and control, and corporate structure of Indian private sector banks.

"Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949 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 said in its report released by the RBI on Friday.

The suggestion is in line with evolving thinking that a liberal ownership structure, backed by strong regulation, would help in expanding the banking services in the country while getting the requisite investment from the corporate sector.

The 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.

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 Rs 50,000 crore and above), 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 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 per cent per cent of the paid-up voting equity share capital may continue, the cap on promoters' stake in long run of 15 years may be raised from the current levels of 15 per cent to 26 per cent.

"This stipulation (26 per cent shareholding) should be uniform for all types of promoters and would mean that promoters, who have already diluted their holdings to below 26 per cent, will be permitted to raise it to 26 per cent 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 per cent, any time after the lock-in period of five years," the committee has said in its report.

As per current regulations, promoters of banks have to reduce their shareholding to 15 per cent level.

To provide further flexibility to promoters of private banks, the committee has said that no intermediate sub-targets between 5-15 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.

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