RBI committee recommends giving banking licence to large corporate or industrial houses

RBI committee recommends giving banking licence to large corporate or industrial houses”

India's Central Bank has suggested large non-banking financial companies (NBFCs) including corporates with asset size above 6.7 billion USA dollars to convert into banks subject to certain conditions in a discussion paper released on Friday. Its terms of reference were: a review of the eligibility criteria for individual entities to apply for a banking license; examination of preferred corporate structure for banks and harmonisation of norms; and review of norms for a long-term shareholding in banks by the promoters and other shareholders.

In a report made public on Friday, the committee recommended that banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past.

The internal working group (IWG) had been constituted in June this year to review extant ownership guidelines and corporate structure for Indian private sector banks. These parallel banking companies are incorporate under companies act and not under banking act. For players such as Equitas and Ujjivan Small Finance Bank, this could help bring in more value for investors and remove the need for double listing of the holding company and the bank.

An internal working group set up by the RBI has proposed to raise the cap on promoters' stake in private banks from the current 15 per cent to 26 per cent in 15 years.

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The IWG also said that the minimum initial capital requirement for licensing new banks should be enhanced from INR 500 Cr to INR 1,000 Cr for universal banks and from INR 200 to INR 300 Cr for SFBs.

"This gives ample flexibility and time for promoters to bring down their holding to 26 per cent over the 10-year period", opines PN Vasudevan, MD and CEO, Equitas Small Finance Bank.

"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 announcement of tax-neutrality", it said. Tata Group and Aditya Birla Group are assessing whether the guidelines of the Reserve Bank are in their favor. Comments on the report may be submitted by January 15, 2021, through email. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, the report mentioned.

The first one related to the entry of corporate houses into banking. However, they may be permitted to make total investments in a financial or non-financial services company, which is not a subsidiary or joint venture or associate up to 20% of the bank's paid-up share capital and reserves. The RBI said it would examine the comments and suggestions before taking a view in the matter. And for urban cooperative banks transiting to SFBs, the initial paid-up capital or net worth should be Rs 150 crore which has to be increased to Rs 300 crore in five years.

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