RBI Working Group Suggests Corporate Entry Into Banking, Higher Promoter Stake

RBI working group recommends liberalising ownership, promoter norms for private banks.

A pedestrian walks past the Reserve Bank of India (RBI) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A pedestrian walks past the Reserve Bank of India (RBI) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

An internal working group of the Reserve Bank of India has recommended significant changes across the banking sector, ranging from a higher promoter stake over a long period of time, the entry of corporate houses into banking and permitting large non-bank lenders to convert into banks.

The working group, headed by PK Mohanty, director, RBI Central Board, was set up in June and has now submitted its report. The working group was created to examine and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure and other related issues.

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Some of the key recommendations listed in the working group’s report include:

  • Large corporate or industrial houses may be allowed as promoters of banks but only after necessary amendments to the Banking Regulation Act, 1949. These changes should include strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
  • The cap on promoters’ stake in the long run, over 15 years, may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank.
  • For non-promoter shareholding, a uniform cap of 15% paid-up voting equity share capital of the bank has been recommended
  • Large non-banking finance companies with an asset size of Rs 50,000 crore, including those owned by large corporate houses, may be allowed to convert to private banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.
  • The minimum initial capital requirement for licensing new banks should be enhanced from Rs 500 crore to Rs 1,000 crore for universal banks, and from Rs 200 crore to Rs 300 crore for small finance banks.
  • Non-Operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However it should be mandatory only if the promoter or promoter group owns other group entities.
  • 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.
  • 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.
  • For payments banks intending to convert to a small finance bank, track record of three years of experience as payments bank may be considered as sufficient.
  • Existing small finance banks and payments banks should be listed within six years from the date of reaching net worth of Rs 500 crore or 10 years from the date of commencement of operations, whichever is earlier.