In a major shift in stance by the Reserve Bank of India, an internal working group [IWG] has suggested allowing corporations and large industrial groups to operate banks. This would be subject to changes in the Banking Regulation Act. Currently, legislation does not permit large industrial houses to have promoter control over private banks.
In this case, large industrial groups in India are defined as companies having more than ₹5,000 crores in assets and where 40% or more of their revenue or assets are from non-financial businesses.
The group notes these concerns through its report by saying, "The IWG was cognizant of the fact that the approach of the Reserve Bank regarding ownership of banks by large corporate/industrial houses has, by and large, been a cautious one in view of serious risks, governance concerns and conflicts of interest that could arise when banks are owned and controlled by large corporate and industry houses".
This suggestion has come from its report on private banking structures in India.
More suggestions include raising promoter stakes to 26% from 15% of paid-up voting equity and thresholds to convert non-banking financial companies (NBFCs) and payment banks into full banks and small finance banks [SFBs] respectively, among others. Moreover, it also suggests how banks should be held by promoters through non-operative financial holding companies [NOHFC] and guidelines on how companies can list.
Here are the salient features of the report.
Large corporations to enter banking
While the central bank seems to be suggesting it is open to large corporates owning banks, it has also acknowledged concerns around misallocated lending, concentration of power, connected lending and heightened risks on industrial houses potentially entering private banking. But, the report also states that their entry could bring capital, expertise and strategy to banking. Further, internationally, only few jurisdictions bar corporations from explicitly participating in banking.
Therefore the IWG suggests amendments to Banking Regulation Act to potentially facilitate their entry subject to stronger regulatory norms. "These would include a strong legal framework for addressing connected lending and an enabling framework for consolidated supervision. These mechanisms would be imperative to deal with intra-group transactions and exposures that may be detrimental to the banking entity", it says.
Currently, corporations are explicitly forbidden from promoting small finance banks and must hold universal banks indirectly through NOHFCs.
Payment Banks To SFBs and NBFC to full banks
The group also suggests how companies offering specific financial services - payment banks and NBFCs or shadow lenders - can progress up the structural ladder and become SFBs and full banks respectively.
It suggests that well-run large NBFCs with assets more than ₹50,000 crores - even if it is run by a corporate house - could convert to full universal bank if they have completed 10 years of operations and meet due diligence with tighter, bank-like regulations for such NBFCs.
Payments banks - of which Jio, PayTM, Airtel and India Posts are examples - can convert to a small finance bank after three years of operations.
The IWG also suggests that the capital needed to acquire a banking licence also increase, with the RBI reviewing them every five years:
- ₹1,000 crores for full banks from ₹500 crores
- ₹300 crores from ₹200 crores for small finance banks
- For urban co-operative banks to small finance banks, initially ₹150 crores which has to be increased to ₹300 crores in 5 years
Higher promoter stakes
A promoter can hold 26% of paid up equity capital in a bank, up from 15%, in an attempt to align shareholding patterns and voting rights, in the long run (15 years), according the IWG report. This would be after the first five years of lock-in period where a promoter needs to maintain minimum 40% of share capital.
The report also acknowledges that previous stances suggesting that lower promoter holding results in better governance was not necessarily true.
Currently, the NOHFC model is used to hold banks, and financial businesses affiliated to it, which in turn could be held by the promoters or a group of promoters and kept an indirect link between the promoters and the bank. Now, the RBI is paving the way to gradually move out of them.
- NOHFCs would be preferred to hold banks, but mandatory only for those entities having other verticals within their group. Banks would be permitted to exit NOHFCs if there were no other group entities.
- Banks licensed before 2013 have to move to NOHFCs within 5 years of attaining a tax-neutral status, but may move to such a setup at their discretion
- The RBI should treat the NOHFC only as a pass through structure
The IWG recommendation notes that 20 of 22 universal private banks but only two of ten small finance banks are listed. No payment banks are listed.
To provide an impetus for listing, the RBI recommends:
- For new SFBs: Earlier of 10 years of operations or six years from reaching prevailing capital norms required for opening a universal bank
- For existing SFBs and payments banks: Earlier of 10 years of operation or six years of reaching net worth of ₹500 crore
- No changes in universal banks, to continue at 6 years of operations
The RBI is accepting feedback via email on firstname.lastname@example.org on these recommendations till January 15, 2021.
The IWG report can be seen here.