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Friday, November 27, 2020

RBI committee for conversion of large NBFCs into banks, entry of corporates

The Internal Working Group of the RBI, headed by PK Mohanty, has said “large corporates and industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949”

By: ENS Economic Bureau | Mumbai | Updated: November 21, 2020 7:28:16 am
The RBI has been against allowing corporate houses to set up or run commercial banks. (Source: Bloomberg)

In a series of proposals, an Internal Working Group (IWG) of the Reserve Bank of India (RBI) has recommended the guarded entry of corporates into the banking space, conversion of big NBFCs into banks and hike in promoters’ stake to 26 per cent from 15 per cent. The group also proposed a hike in minimum capital for new banks from Rs 500 crore to Rs 1,000 crore.

“The cap on promoters’ stake in the long run — 15 years — may be raised from the current level of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank,” the group proposed. This stipulation should be uniform for all types of promoters and would mean that promoters, who have already diluted their holdings to below 26 per cent will be permitted to raise it to 26 per cent of the paid-up voting equity share capital of the bank, it added.

The committee, headed by PK Mohanty, has said “large corporates and industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949” and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision. This is to prevent connected lending and exposures between the banks and other financial and non-financial group entities, it added.

The RBI has been against allowing corporate houses to set up or run commercial banks.

“Well-run large non-banking finance companies (NBFCs), with an asset size of Rs 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,” it said. The IWG was constituted by the RBI on June 12 to examine and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure and other related issues.

On non-promoter shareholding, the panel has suggested a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders.

For payments banks intending to convert to a small finance bank (SFB), track record of three years of experience as payments bank may be considered as sufficient, the working group said.

SFBs and payments banks may be listed within six 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, it has proposed.

The minimum initial capital requirement for licensing new banks should be enhanced from Rs 500 crore to Rs 1,000 crore for universal banks and from Rs 200 crore to Rs 300 crore for small finance banks. The initial voting capital should be raised from Rs 150 crore to Rs 300 crore in five years, it said.

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 and converting entities have other group entities, the IWG said.

While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 should move to the NOFHC structure within five years from announcement of tax-neutrality, it has proposed.

According to the committee, till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries, joint ventures and associates need to be addressed through suitable regulations.

Banks currently under NOFHC structure should be allowed to exit from such a structure if they do not have other group entities in their fold.

The Reserve Bank may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible, it said. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks, the panel said.

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