EBM News
EBM News

RBI’s internal working group moots raising promoter stake, allowing corporates to own banks

NEW DELHI: In what could lead to significant changes in the ownership structure of private banks, an internal working group of the Reserve Bank of India (RBI) has proposed a more liberal structure that allows promoters to hold higher shareholding in private banks. It suggested that the cap on promoters’ stake should be raised to 26 per cent over a period of 15 years from the current 15 per cent. On non-promoter shareholding, the working group recommended a uniform cap of 15 per cent for all shareholders.

“Permitting higher shareholding up to 26 per cent of the paid-up voting equity share capital of the bank will enable promoters to infuse higher funds which are critical for expansion of banks and work as a cushion to rescue the bank in times of distress/cyclical downturn,” the IWG noted. Currently, the rules currently require the promoter of a private bank to reduce the holding to 40 per cent within three years, 20 per cent within 10 years and 15 per cent within 15 years of operations. Deliberating on international practises, it said most other jurisdictions such as Indonesia, Japan, South Korea or even Germany do not enforce similar limits on bank ownership, though there are due diligence thresholds.

In its report released Friday, the internal working group also recommended allowing large corporates or industrial houses to own banks if they meet certain regulations, something that the banking regulator has firmly objected to in the past. “Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities,” it stated.

Whether to grant big corporations a banking licence is an issue which is as old as the exercise of granting licence itself. Back in the 1990s, when the central back doled out its first set of licenses, it left out industrial houses. However, the PK Mohanty-led report on private banks’ ownership and corporate structure guidelines, prescribed that for the banking sector to play a greater role in economic growth, it’s imperative for the underlying ecosystem that is dominated by public banks to change and the role of the private banks will, thus, be crucial.

As many as 14 licenses for universal banks have been issued in the private sector since 1993, out of which just 10 are operational. However, none of these banks could break into the global top-100 by asset size. As on December 31, 2019, the asset size of HDFC Bank, Bank of Baroda, ICICI and Axis Bank stood much lower than Spanish Banco de Sabadell, a Spanish bank, which ranks 100th.

Allowing such entities would mean that they can be an important source of capital and can bring in their experience, management expertise, and strategic direction to banking. In fact, many of such corporate/industrial houses have been successfully operating in other financial segments. Notwithstanding the merits, however, IWG advocated that it will also be necessary to significantly scale up the supervision capacity before considering large corporate houses to promote banks. “These would include a strong legal framework for addressing connected lending and an enabling framework for consolidated supervision. These mechanisms would be imperative to deal with intra-group transactions and exposures that may be detrimental to the banking entity,” it said in the report.

For instance, even as the US does not allow commercial firms to own banks, there are specific provisions in the Federal Reserve Act on regulating relations with affiliates and even putting restrictions on transactions with affiliates. In India, too, the need for such an enabling legal provision was flagged by two Committees in the past – Working Group on Consolidated Accounting and Other Quantitative Methods to Facilitate Consolidated Supervision (2001) and Inter-Regulatory Working Group on Monitoring of  Financial Conglomerates (2004). While the Reserve Bank has issued guidelines in 2014 on Management of Intra-Group Transactions and Exposures, without appropriate legal backing the concerns in this regard will not be fully addressed, the IWG observed.

Lastly, the working group has also suggested that large non-banking entities with an asset size of Rs. 50,000 crore and above, including those which are owned by corporate houses, maybe converted for conversion into banks subject to completion of 10 years of operations.

Some of the large industrial houses like Aditya Birla, Bajaj,  Mahindra and Mahindra, and Tata Sons already have large NBFCs with more than a decade of operations. It added that the minimum initial capital requirement for licensing new banks be doubled to Rs.1000 crore for universal banks, and enhanced from Rs.200 crore to Rs.300 crore for small finance banks. The banking regulator has sought comments from stakeholders on the report by January 15, 2021, after which it will take a final call on this matter.