RBI keeps on hold suggestion to give bank licence to big businesses

The Reserve Bank of India (RBI) on Friday said it was still examining if industrial houses should be allowed to run banks as recommended by an internal working group (IWG), but accepted its suggestion to increase the cap on promoters’ stake in banks to 26 per cent from the current 15 per cent.

The central bank accepted 21 of the 33 recommendations suggested by the IWG, headed by Prasanna Kumar Mohanty, director, central board of the RBI.

The group, constituted on June 12 last year, had suggested in its November 20 report that large corporate or industrial houses be allowed in banking after amendments to the Banking Regulation Act. This recommendation had created an uproar, even among former RBI governors and deputy governors.

The central bank did not accept this suggestion and 11 others immediately, and said those were “under examination”.

In its final decision on “ownership guidelines and corporate structure for Indian private sector banks”, released on its website, the suggestion to big businesses did not find mention.

The central bank also said the non-promoter shareholding cap for an individual or non-financial institution should remain 10 per cent against the group’s suggestion of a uniform 15 per cent ceiling for all kinds of non-promoter shareholders.

However, financial institutions, supranational institutions, public sector undertakings, or the government will be allowed to hold 15 per cent in private banks, the RBI said.

A senior banker, an expert in RBI regulations, pointed out this was a tightening of RBI regulations in the matter. According to the RBI’s earlier rules, non-promoter shareholding could rise to 40 per cent for regulated, well-diversified, and listed financial institutions, supranational institutions, public sector undertakings, or the government.

Among other major recommendations accepted by the central bank, with or without modification, is not allowing promoters to pledge their shares during the initial lock-in period.

The RBI’s rules say promoters must keep their shareholdings at a minimum of 40 per cent for the initial five-year period, and bring it down progressively to the RBI’s prescribed cap for promoters (revised to 26 per cent on Friday). Pledging shares during the lock-in period risks bringing down the shareholding, which potentially violates the RBI rules on lock-in restrictions, said the senior banker.

The central bank also accepted the suggestions on a “reporting mechanism” for pledging shares by promoters. There is no such mechanism in the system now.

The central bank rejected the recommendation on allowing payments banks to convert themselves into small finance banks with three years’ experience. The RBI said for such a conversion, at least five years’ experience should be the norm.

The central bank accepted the group’s recommendation that banks should have higher initial capital. For example, it should be at least Rs 1,000 crore for universal banks against Rs 500 crore now.

The RBI also accepted the group’s suggestion that all new bank applicants with other group entities must float a non-operative financial holding company (NOFHC).

The NOFHC structure was mandatory in all cases under the 2013 licensing guidelines, but the requirement was relaxed in 2016 for on-tap licensing except in cases where the applicants had even a single group entity, irrespective of it being a financial entity or not.

RBI DECISIONS ON KEY RECOMMENDATIONS

• Long-term cap on promoters’ stake to be raised from 15% to 26%
• Non-promoter shareholding for individuals and non-financial entities capped at 10%, against suggestion of 15%
• Payments banks must operate for 5 years before turning into SFBs; group had recommended 3 years
• Minimum initial capital for universal banks should be raised to Rs 1,000 cr from Rs 500 cr now
• Banks not having group entities should be allowed to get out of NOFHC
• SFBs must be listed within 8 years, as against 10 years suggested  

The RBI said SFBs must get listed within eight years of commencing operations. The working group had suggested six years from reaching a universal bank’s minimum net worth or 10 years from the commencement of operations, whichever was earlier.

The central bank also accepted the group’s recommendation that whenever changes are made in bank guidelines, they should be applicable to both new banks as well as existing banks. If the rules are relaxed, the existing banks should be given relief, and if the rules are tightened, the existing banks should be given a transition period.

However, according to the senior banker, the central bank has been fine-tuning the banking guidelines based on the requirements of the time.

The RBI has so far issued eight bank licensing guidelines to harmonise the rules and regulations. But differentiated banks required certain rules that differed on account of the nature and scope of their work.

“Harmonising all guidelines, to the extent possible, is desirable to create a level playing field. But timelines and a graduated smooth transition path are also necessary to ensure implementation in a non-disruptive manner,” said the person.

Former RBI governor Raghuram Rajan and deputy governor Viral Acharya had questioned the recommendation and timing of the working group itself. 

“Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no. Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking,” Rajan and Acharya had said in a joint statement in November last year.