RBI panel proposes to raise promoters cap to 26% in private banks

Marco Green
November 22, 2020

An internal committee of the Reserve Bank of India (RBI) on Friday proposed an overhaul of the licensing policy for private banks and suggested allowing large corporate and industrial houses to float banks in India after suitable amendments to the Banking Regulation Act, which should be aimed at preventing concentration of risks and unabated lending among group companies.

The group has also recommended that large corporate or industrial houses may be allowed as promoters of banks only after amendments to the Banking Regulation Act and strengthening of the supervisory mechanism for conglomerates, including consolidated supervision.

The recommendations, bankers said, could usher in a fresh wave of consolidation in the sector, where several lenders are struggling to meet minimum capital norms because of a surge in bad loans.

Striking a balance between the need to diversify ownership and bring in more skin in the game for promoters, the working group has recommended a higher promoter holding of 26 per cent (within 15 years). 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.

According to the working group proposals, banks now 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 also suggested that payments banks can convert into small finance banks after three years of operations, potentially benefiting Paytm, Jio and Airtel payments banks.

Large NBFCs such as M&M Financial Services, Bajaj Finance, Shriram Transport and Chola Investment and Finance - with assets size of more than ₹50,000 crore - can now consider converting into banks.

Among other things, the report recommends promoter stake cap in long run - 15 years - be raised to 26 percent from 15 percent if paid-up voting equity share capital. This included relaxation in NPA (non-performing assets) classification and funding through the Small Industries Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD) and the National Housing Bank (NHB), among other measures.

AgenciesRBI panel is in favour of allowing large companies to become bank promoters post legal changes. But once the NOFHC structure achieves a tax-neutral status, all those banks shall move to the NOFHC structure within five years from the tax-neutrality announcement.

The RBI has sought comments of stakeholders and members of the public, to be submitted by January 15. The 2014 SFB licensing conditions had barred large corporate/industrial houses from promoting banks. "The idea is to ensure that there is enough capital for private sector banks in line with the vision of a $5 trillion economy".

For urban cooperative banks looking to transition to a small finance bank, The initial paid-up voting equity share capital/ net worth should be Rs 150 crore, which has to be increased to Rs 300 crore in five years, it further added. RBI will take a decision after reviewing them.

Other reports by Click Lancashire

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