‘Raise private bank promoter cap to 26%’

Cornelia Mascio
Novembre 21, 2020

Reserve Bank of India on November 20 released a report on the internal working group (IWG) recommendations on private bank ownership and corporate structure.

The IWG in its recommendations had also said that non-promoter shareholding may be capped at 15 percent of paid-up voting equity share capital for all shareholders.

In a report made public on Friday, the committee recommended that banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past.

Also, well-run non-banking financial companies (NBFCs), with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations, meeting due diligence criteria and compliance with additional specified conditions, the panel said.

The cap on promoters' stake in private banks has been proposed to be raised to 26 per cent from 15 per cent over a period of 15 years. The RBI had constituted the internal working group (IWG) in June, chaired by its executive director P.K. Mohanty.

The terms of reference of included review of the eligibility criteria for individuals/ entities to apply for banking license; examination of preferred corporate structure for banks and harmonisation of norms; review of norms for long-term shareholding in banks by the promoters and other shareholders.

It recommended 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. Banks now under NOFHC may be allowed to exit from such a structure if they do not have other group entities in their fold. Banks licensed before 2013 may move to a NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status. It added that banks now under the NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold. The central bank had toyed with the idea in the past but stayed away from allowing any large industrial house to enter banking because of governance concerns and the risk of conflict of interest with the fear being that group firms or associate companies could stand to gain if an entity in the same group sets up a bank. "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", the panel said in its report. And, intermediate sub-targets between 5 and 15 years may not be required, but at the time of issuing licences, promoters may submit a dilution schedule to the Reserve Bank of India (RBI) for approval. "Biggest may become bigger but the beneficiary should include the common citizen", he added.

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