RBI panel suggests hike in promoter stake cap to 26%, non-promoter to 15%

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. For non-promoter shareholding, a uniform cap of 15 per cent has been proposed – up from 10 per cent. Promoters can choose to bring down the holding to even below 26 per cent at any time after a lock-in period of five years. 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.

These are among the key recommendations made by the internal committee of the RBI, set up to review the extant ownership guidelines and corporate structure for private banks in the country. Comments on the report are to be submitted by January 15.

The small finance banks (SFB) guidelines, which permit 26 per cent holding in the long run, allow non-banking financial companies (NBFCs) and local area banks to start with 26 per cent if the entity has already diluted holding due to regulatory norms.

“Permitting higher shareholding 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,” noted the panel.

Looking at global practices, the panel felt that “if India's private banks are to grow, it appears desirable that they be permitted to access the pool of capital available in India and elsewhere without imposing excessively narrow investment limits”.

The panel felt that while it is desirable to have widely held banks to ensure that controlling stake is not vested in one person and entity, “when individual holdings are small and shareholders are diffused, they also tend to be disengaged”.

This view of the panel takes off from the P J Nayak Committee, which was for promoters’ holding of 25 per cent as “low promoters’ shareholding could make banks vulnerable by weakening the alignment between management and shareholders”.

As for non-promoter holding, while it has been proposed that the cap be hiked to 15 per cent, it was opined that “the due diligence process as prescribed in the ‘Master Directions on Prior Approval, 2015’, for shareholding above 10 per cent may be continued. And, that the RBI “should reserve the right to prescribe any lower ceiling on holding or curb voting rights of promoters and non-promoters, if at any point of time they are found to be not meeting ‘fit and proper’ criteria”.

The panel has also proposed a reduction in the time-frame needed for payments banks to convert into small finance banks (SFB) to three years from five years. A tweak has also been suggested in the listing criterion for SFBs and payment banks. They may list within six years from the date of reaching the net worth equivalent to prevalent entry capital requirement prescribed for universal banks or 10 years from the date of commencement of operations, whichever is earlier.

The revised threshold capital for licensing new universal banks is proposed to be doubled to Rs 1,000 crore; and to Rs 300 crore for SFBs from Rs 200 crore.

The panel’s recommendations have also brought clarity on the glide-path with regard to non-operative financial holding company (NOFHC).

It is speculated that the panel’s suggestions could well be acted upon in the Union Budget of FY22 with the finer operational guidelines kicking in later. It could set the stage for the privatisation of state-run banks with more free-play for foreign banks which decide to opt for local incorporation, and private equity firms.

The release of the RBI working group’s report comes on the heels of DBS Bank being merged with the beleaguered Lakshmi Vilas Bank.

The panel said the RBI might take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. It said “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.”
 
This, top banking sources said, is a clear indicator that sweeping changes to the bank licensing and governance topography must not be prone to litigation or seen as privileging one set of players over another; and the transition to a new regime is smooth.