Reducing promoter stake in private banks: RBI panel for nuanced approach

The RBI committee has recommended doing away with one size fits all approach to private banks' ownership

A Reserve Bank of India committee has recommended doing away with one size fits all approach to ownership in private sector banks. Instead of the current bank licensing rules which make it mandatory for promoters of private bank to reduce their ownership to 40 per cent within three years and to settle at 15 per cent in 15 years, the committee headed by RBI executive director PK Mohanty has suggested a more nuanced approach. The report of the committee is to be made public soon.

It has also suggested a rereading of the fit and proper criteria for entities that wish to set up or acquire banks. A top government official had recently told Business Standard the existing criteria made it almost impossible to nurse a sick bank to a healthy position, because of the guidelines that effectively precludes any business group from entering the banking space. The committee is learnt to have supported larger non-banking financial companies to enter the banking space. The argument goes that some of them are far larger than some of the existing banks, yet while the banks are tightly regulated the NBFCs have soft regulations, something that RBI deputy governor Rajeshwar Rao had recently pointed out.

On dilution of promoter stake in banks, the Mohanty committee has apparently asked for separation of their effective stake and their voting rights in the banks to create a gradient approach with permutations. It will apply to not only disinvestment of holdings but could also create space for better run NBFCs to become banks. This is expected to balance the current trend of a narrow band of people keeping control on banks with ensuring a diversified ownership.

The press release announcing the setting up of the committee had noted that, “Though the overarching principles that the ownership and control of private sector banks should be well diversified and that the major shareholders are ‘fit and proper’ have remained unchanged, the specific contours have evolved over the years with specific prescriptions being given as part of licensing guidelines issued at various points in the past. It is, therefore, felt necessary to comprehensively review the extant guidelines on ownership, governance and corporate structure in private sector banks, taking into account key developments which have a bearing on the issue”. The five member committee had submitted its report in October to RBI.

The committee’s report will also help the government bring in more stakeholders in public sector banks. The recapitalisation needs of these banks are massive. The government is not keen to pump in money from its balance sheet without setting up a road map to disinvest in them by bringing in a diversified ownership. It is a tricky terrain for which the Mohanty committee report is expected to provide solutions.