IWG of RBI Recommends Banking Reforms-Entry for Corporates into Banking

IWG of RBI Recommends Banking Reforms-Entry for Corporates into Banking

IWG of RBI Recommends Banking Reforms-Entry for Corporates into Banking Sector

Executive Summary:

Internal Working Group (IWG) of RBI has recommended:

*  The entry of large corporates/industrial houses into the banking sector to make it more competitive and boost economic revival.

* NBFCs with an asset size of ₹50,000 crores and above and have completed 10 years of operation may be converted to banks.

* Increase of minimum initial capital requirement for licensing new banks from ₹500 crores to ₹1000 crore for universal banks, and from ₹200 crores to ₹300 crores for small finance banks.

* Increase in promoters’ stake from 15 percent to 26 percent of the paid-up voting equity share capital of the bank.

* Payments banks with a track record of 3 years eligible to convert to Small Finance Banks.

Introduction:

The fast-changing financial market and technological developments augur newer opportunities to transform the banking landscape. With a view to scale up the banking sector and be competitive through the entry of new players and align with the agenda set for the economic growth of the country to become a $5 trillion economy, the Reserve Bank of India (RBI) initiated the process for a comprehensive review of the extant guidelines on licensing and ownership for private sector banks and, on June 12, 2020, constituted an Internal Working Group (‘the IWG’) to examine and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure and other related issues. The IWG in its report has, among other recommendations, suggested the opening up of the banking sector to large corporate/industrial houses and conversion of NBFCs into banks.

Recommendations of IWG: 

* 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. A uniform cap of 15 percent of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders.

* Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949.

* Well run large Non-banking Financial Companies (NBFCs), with an asset size of ₹50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.

* For Payments Banks intending to convert to a Small Finance Bank, a track record of 3 years of experience as Payments Bank may be considered as sufficient. Small Finance Banks and Payments Banks may be listed within 6 years from the date of reaching 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 minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crores to ₹1000 crore for universal banks and from ₹200 crores to ₹300 crores for small finance banks.

* Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters / promoting entities/ converting entities have other group entities.

* While banks licensed before 2013 may move to a NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from the announcement of tax-neutrality.

* Till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries/ Joint Ventures/ associates need to be addressed through suitable regulations.

Large corporate/industrial houses may be granted banking licenses only after necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities; and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision. Similarly, NBFCs with an asset size of ₹50,000 crores and above and with a good track record of 10 years can be considered for conversion into banks.

Eligible entities can either apply for a banking license or convert their existing lending business into a bank. The minimum initial capital requirement for licensing new banks will be enhanced from ₹500 crores to ₹1000 crore for universal banks and from ₹200 crores to ₹300 crores for small finance banks. The promoter cap will also be increased from 15 percent to 26 percent of the paid-up voting equity share capital of the bank. Payment banks with a good record of 3 years will be eligible for conversion to Small Finance Bank.

Conclusion

These sweeping changes, if implemented, will definitely boost the banking sector by ushering in competition, cash flow, use of technology, better planning, and implementation strategies and expertise thus paving way for economic growth.

NBFCs are also important in the quest for the economic revival of the cash-starved economy. Some of the private NBFCs are well managed and contributing to the economic growth of the nation. At the same time, the entry of large corporates/industrial houses into the banking sector will open paths for connected financing through self-owned banks and increase the burden on the economy through rising in NPAs, if such loans are not serviced periodically.

The very motive of the banking sector should not be diluted by the entry of private players. Further, the depositors also need to trust the private bankers for the security of their money.

RBI will have to adopt a cautious approach to check connected lending, governance issues, and strengthen the supervisory mechanism to monitor the working of banks promoted by corporates.

Regards,
Legal Team

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