The Reserve Bank of India’s Internal Working Group (IWG) has proposed several positive alterations within the nation’s banking sector, resonating a paradigm shift. These modifications deal with the integration of corporates into banking space, the transformation of big Non-Banking Financial Companies (NBFCs) into banks, and hikes in both promoters’ stake and the minimum capital for new banks. The IWG, led by PK Mohanty, initiated this review in June 2020 to assess existing ownership guidelines and corporate structures for private sector banks in India.
Entry of Corporates into Banking Space
The IWG suggests a cautious induction of large corporates and industrial houses into the banking industry as promoters, but only after amending the Banking Regulation Act, 1949. This move aims to curb intertwined lending and exposures between banks and other financial/non-financial entities. Historically, the RBI has been against allowing corporate houses to start or manage commercial banks due to their poor performance on governance and credit allocation.
Transformation of NBFCs into Banks
According to the recommendations of the IWG, well-run large NBFCs with an asset size of Rs. 50,000 crore and above, even those owned by corporate houses, could be eligible for conversion into banks. However, they need to have completed 10 years of operations and meet due diligence criteria and compliance with additional conditions specified in this regard.
Hike in Promoters’ Stake
The IWG suggests increasing the cap on promoters’ stake in the long run (15 years) from its current level of 15% to 26% of the paid-up voting equity share capital of the bank. As for non-promoter shareholding, a uniform cap of 15% of the paid-up voting equity share capital of the bank is advised for all types of shareholders.
Hike in Minimum Capital for New Banks
The proposal advises elevating the minimum initial capital requirement for licensing new banks 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. Universal Banks offer a combination of wholesale banking, retail banking, and investment banking.
Payments Banks’ Conversion into Small Finance Bank
For payments banks wishing to transform into a Small Finance Bank (SFB), a track record of 3 years of experience as a payments bank may be considered adequate by the IWG. Payments banks operate on a smaller or limited scale, while Small Finance Banks provide financial services to the unserved and unbanked regions of the country.
Harmonisation and Uniformity in Different Licensing Guidelines
The IWG suggests that the RBI should strive for harmonization and uniformity across different licensing guidelines. If new rules are more relaxed, existing banks should benefit; conversely, if new rules are tougher, legacy banks should also conform, though a non-disruptive transition path could be provided.
Non Operative Financial Holding Company
The IWG recommends continuously using NOFHC as the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only when the individual promoters, promoting entities, and converting entities have other group entities.
Way Forward
Recent failures of internal and external controls, such as the fraud case involving Punjab National Bank and the collapses of Lakshmi Vilas Bank and Yes Bank, emphasize the need for new regulations with a high degree of supervisory mechanisms and corporate governance. These mechanisms should harness strong IT and AI-enabled platforms. When a corporate house is a promoter, strict regulations will be necessary for monitoring fund use and related party transactions. The fitness and propriety criteria must be foolproof, with common citizens emerging as the primary beneficiaries of these processes.
