RBI Internal Working Group’s suggestion: Big business houses may soon promote banks

By: |
November 21, 2020 7:30 AM

For instance, large, well-run non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore and above could become banks post 10 years of operations once they pass the due exercise.

These could be owned by a corporate house so a Bajaj Finance, L&T Financial Holdings or an M&M Financial could make the cut.These could be owned by a corporate house so a Bajaj Finance, L&T Financial Holdings or an M&M Financial could make the cut.

In a significant shift of stance, large corporates and conglomerates could own banks if the suggestions of an internal working group (IWG) constituted by the Reserve Bank of India (RBI) are accepted. The IWG recommends sweeping changes and easier rules that could altogether alter the Indian banking landscape with the presence of many more banks of all hues.

For instance, large, well-run non-banking finance companies (NBFCs), with an asset size of Rs 50,000 crore and above could become banks post 10 years of operations once they pass the due exercise. These could be owned by a corporate house so a Bajaj Finance, L&T Financial Holdings or an M&M Financial could make the cut.

Many NBFCs have been keen to turn into banks as it would give them access to cheap CASA deposits even if meeting statutory ratios are initially expensive. For its part, RBI may prefer NBFCs become banks as they could then be better regulated and subject to more regulations.

A final stake of 26%, as the IWG suggests, up from the current 15% could be a sweetener. If accepted, it would standardise the relaxation given to Uday Kotak, promoter of Kotak Mahindra Bank, earlier this year. For non-promoter shareholders, a uniform cap of 15% has been prescribed.

However, the IWG feels the initial limit of a 40% shareholding remains, with no upper ceiling during the first five years. Payments banks intending to convert to a small finance bank (SFB) need a track record of three years as a payments bank, lower than the current minimum of five years.

SFBs and payments banks may be listed within six years from the date of reaching a 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 changes come against the backdrop of putting the Indian economy on the path of fast growth which would not be possible without strong credit institutions. However, experts caution the liberal norms need be accompanied with changes that ensure stricter supervision and oversight of the banking system.

For business groups to set up banks the Banking Regulation Act, 1949, needs to be amended. The objective would be to “prevent connected lending and exposures between the banks and other financial and non-financial group entities” and to strengthen the supervisory mechanism for large conglomerates, including consolidated supervision.

While acknowledging the risks posed by corporate ownership of banks, the IWG believes such entities can be an important source of capital and can bring in their experience, management expertise and strategic direction to banking. “It is also a fact that many of such corporate/industrial houses have been successfully operating in other financial segments,” the panel noted. It added that internationally, there are very few jurisdictions which explicitly disallow large corporate houses, and even in these jurisdictions, it is not a settled issue.

The group recommends a higher minimum initial capital for licensing new banks of Rs 1,000 crore from Rs 500 crore for universal banks and of Rs 300 crore from Rs 200 crore for SFBs. It also feels the non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new universal bank licences and 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, the group said. 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.

The panel maks a case for ensuring harmonisation and uniformity in different licensing guidelines. “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,” it said.

The IWG was chaired by RBI central board director PK Mohanty; members were Sachin Chaturvedi, also central board director, Lily Vadera and SC Murmu, both EDs at the central bank, and CGM Shrimohan Yadav was the convenor. The report has been placed on the RBI website for comments from stakeholders and members of the public. Comments on the report may be submitted by January 15, 2021.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1RBI to issue norms for payment security, raises contactless cap to Rs 5,000
2RBI plans scale-based regulatory approach for NBFCs
3‘RBI ensures ample liquidity to support growth; rate cuts unlikely as inflation remains sticky’