The Reserve Bank of India (RBI) released a press release on Friday. The release states that RBI had formed an Internal Working Group (IWG) on June 12, 2020. The IWG had to evaluate the extant ownership guidelines and corporate structure for Indian private sector banks. They have suggested permitting large corporate and industrial houses to promote private banks. RBI has always been reluctant to allow large businesses to promote banks.
Previously, when RBI did issue private bank licenses, the banking regulator allowed corporate houses to apply. But RBI turned down their applications and favored financial institutions who had banking transactions experience. With the IWG’s new report, this is about to change.
This new proposal still comes with certain riders. As per the IWG recommendations, they would allow large corporate or industrial houses to allow the promotion of banks. But only after the necessary amendments to the Banking Regulation Act, 1949.
This will be done to:
- Prevent connected lending.
- Prevent exposures between the banks and other financial and non-financial group entities.
- Reinforcing the supervisory mechanism for large organizations, such as consolidated supervision.
RBI would allow NBFCs to convert themselves into banks
Another major point in the report is that the RBI will now allow large Non-Banking Financial Companies (NBFC’s) to convert themselves into banks. The NBFC’s would have to qualify the following criteria to qualify RBI’s proposal for them turning into banks:
- Efficiently run large NBFC’s with an asset size of Rs. 50,000 crores and above.
- They should be subjected to 10 years of completion of operations and meet their due diligence criteria.
- They should also comply with the additional conditions that are specified to them.
This set of rules also apply to corporate house owned NBFC’s.
According to the source, this would benefit several corporate houses who control NBFC’s and wish to convert them into banks.
In 2013-14, the RBI invited applications for new private banks. The conglomerates that applied for permits then include:
- Tata Sons
- Aditya Birla Nuvo, part of the Aditya Birla Group
- L&T Finance Holdings, part of the engineering corporation Larsen & Turbo. Larsen & Turbo is also India’s largest engineering conglomerate.
- Reliance Capital
- INMACS Management Services Ltd
Then, only Bandhan and IDFC were able to procure the licenses.
IWG has put their attention on NOFHC’s
NOFHC or Non-operative Financial Holding Companies are also under a lot of emphases. According to the report, NOFHC’S should resume being the preferred structure for all new licenses that are issued for universal banks. This, however, should be mandatory only in certain cases where the individual promoters/promoting entities/converting entities have other group entities.
Also, the reports said that banks that received their licenses before 2013 might move to a NOFHC structure with caution. 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.
Although, banks presently under the NOFHC structure might get permission to exit from the model if they don’t have other group entities in their fold. The distress regarding banks taking up different activities via subsidiaries/joint ventures/associates need to be tackled with suitable regulatory laws.
The IWG proposal also clearly states that the RBI must take steps to ensure harmonization and uniformity in different licensing guidelines, to the extent possible. Existing banks should benefit from the new licensing guidelines if the new rules are more relaxed. If the new rules are tougher, then legacy banks should also conform to the new and tighter regulations. They also said that a non-disruptive transition path would be provided to affected banks.
According to the report, the cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15 percent to 26 percent of the paid-up voting equity share capital of the bank.
All in all, the IWG’s proposals address some of the controversial issues in regards to standard ownership of private banks.