Leveling the playing field, the report also recommends that the 15% cap on promoter holding in the long-run may be increased to 26%
The Reserve Bank of India’s Internal Working Group has made recommendations that have the potential to change the landscape of India’s banking industry. The report suggests changes on ownership and corporate structure of private sector banks. The RBI has currently not finalised the acceptance of the report; the final recommendations will only be known later. However, the magnitude of the changes proposed has sparked a conversation around how these changes might affect the financial institutions if the RBI accepts the recommendations.
The key changes proposed by the report deal with ownership of banks. It suggests four changes, of which some have the potential to reorient the banking space.
1) It proposes allowing large corporate houses as promoters of banks, subject to amendments to the Banking Regulations Act.
2) The report recommends conversion of well-run decade-old large NBFCs with asset size of over Rs 50,000 crore to banks.
3) It recommends raising the cap on promoter’s stake in the long run to 26% from the current 15% while placing a uniform cap on non-promoter holding by any entity at 15%.
4) NOFHC should continue to be the preferred structure for all new licenses to be issued for universal banks.
Corporate houses to own banks?
The primary talking point, since the report was made public, deals with the recommendation that corporate houses be allowed as promoters of banks. RBI has in the past discouraged corporate houses owning banks, as it could lead to governance concerns and conflict of interest. Analysts at HDFC Securities say that they resonate with the central bank on this issue. “Despite briefly allowing industrial and business houses to apply for a banking license under the 2013 edition of its licensing guidelines, the RBI granted a banking license only to two entities — IDFC Bank and Bandhan Bank, both erstwhile financial institutions,” HDFC Securities said. They added that several corporate houses withdrew applications citing excessive regulatory requirements.
Here, some large corporate houses might look towards acquiring mid-sized banks if they wish to foray into the banking space rather than starting from scratch. The move is aimed at increasing the number of private sector banks. “… many PSBs do not have enough capital and are struggling with asset quality challenges; therefore, there is a need to bring more private banking entities to support the govt. vision to reach a $5 trillion economy,” said brokerage firm Motilal Oswal. Recently, according to reports, Adani Group expressed interest in acquiring DHFL’s lending business.
NBFCs given option to upgrade
The other recommendation, aiming to get the same result talks about allowing NBFCs to convert to banks. However, NBFCs looking to convert will have to abide by banking regulations such as complying with a minimum of SLR ratio of 18%, CRR of 4% and PSL ratio of 40%, which would hit their profitability. Apart from these, conversion to banks will also rope in expenses like technology, branch expansion will also hit those NBFCs. “We believe final recommendations are favourable for corporate houses promoted by large NBFCs namely Bajaj Finance, L&T Finance, Mahindra Finance, Aditya Birla Capital, etc who may now look forward to converting to a universal bank,” said ICICI Securities.
Leveling the playing field, the report also recommends that the 15% cap on promoter holding in the long-run may be increased to 26%. This is likely to benefit IndusInd Bank while others who have trimmed their stake might be allowed to increase their holdings.
Banks with subsidiaries may be hit
Moving away from the earlier rule that made the NOFHC mandatory where there is at least one other entity in the group with significant control over it, the report now suggests NOFHC should be preferred structure where promoters have other group entities while allowing banks under NOFHC structure without other group entities to exit. This move will likely have implications on banks that have wholly owned subsidiaries in the insurance space, mutual funds or NBFC. Banks will now have to either reduce their stake in such entities to below 20% or move to the NOFHC model.
“We believe these recommendations indirectly hint at long-pending holdco structure for conglomerates, where possibly the tax implication could have been a big hurdle. Thus, the government move to make the internal entity transfers required to create a holdco structure tax (direct/indirect tax) neutral should be a big relief,” said brokerage firm Emkay Global. The brokerage believes that transitional impact of this move could be seen in Axis Bank, Kotak Mahindra Bank, and ICICI Bank. HDFC Bank too could face headwinds.