Raise promoter’s stake in private banks, double minimum capital need for licensing new banks: RBI Panel

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November 20, 2020 6:23 PM

Well-run large 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.

small finance banks, payment banks, rbi, reserve bank, private banksThe RBI was set-up on April 1, 1935, as per the provisions of the Reserve Bank of India Act, 1934.

An Internal Working Group (IWG) constituted by RBI today suggested that the cap on promoters’ stake in private banks may be raised from the current 15 per cent to 26 per cent of paid-up voting equity share capital in the long run. The group also recommended a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank for all non-promoter shareholders. Over the last few years, promoters of private banks, including Uday Kotak of Kotak Mahindra Bank, have been forced to cut their personal stake towards bringing it down to the 15 per cent limit. 

RBI Panel further said that the large companies or 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, and strengthening of the supervisory mechanism for large conglomerates.

In another important recommendation, the IWG suggested that 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, may be considered for conversion into banks. These conversions will be done if NBFCs complete 10 years of operations and meet due diligence criteria and compliance with additional specified conditions.

“The conversion of large NBFCs into banks will bring more stability to the Indian financial system. The recent events have exposed the systematic risks that can be brought by NBFCs, and the current recommendations address this issue quite well,” Mohit Ralhan, Managing Partner & CIO, TIW Private Equity, told Financial Express Online.

The recommendations also included provisions for payments banks intending to convert to small finance banks. IWG said that a track record of three years of experience as payments banks may be considered sufficient. Further, 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 recommendations will give impetus to broadening the coverage of the banking system in India through encouraging payments banks and small finance banks, Mohit Ralhan added.

However, the Working Group has also suggested doubling the minimum initial capital requirement for licensing new banks from Rs 500 crore to Rs 1,000 crore for universal banks and raising it from Rs 200 crore to Rs 300 crore for small finance banks. Meanwhile, the report is placed on the RBI website for comments, which would further be examined by the central bank before coming to a conclusion.

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