Money & Banking

Key RBI recommendations that stand out

Radhika Merwin Chennai | Updated on November 21, 2020

Increasing the cap on promoters’ stake in the long run (15 years) from the current levels of 15 per cent to 26 per cent, ample leeway for promoters to dilute their stake, existing banks being allowed to exit the non-operative Financial Holding Company (NOFHC) structure if they do not have other group entities, allowing large corporates as promoters of banks and permitting large NBFCs to convert into banks – these are some of the key recommendations of the RBI working group that are hugely welcome. The group was set up to review ownership guidelines and corporate structure for Indian private sector banks.

Bone of contention

One of the main bone of contention has been the compulsory dilution of promoter stake to mere 15 per cent within a period of 15 years from the date of commencement. After setting up the business and running it for years and pumping in funds, promoters have often felt short-changed with the 15 per cent cap, which does not give them a substantial representation in the entity, let alone a controlling stake.

Striking a balance between the need to diversify ownership and bring in more skin in the game for promoters, the working group has recommended a higher promoter holding of 26 per cent (within 15 years). This may act as a big nudge to NBFCs sitting on the side lines to convert into banks. What’s more, the existing sub-targets for dilution between 5-15 years has been proposed to be dispensed with, which is a huge positive.

“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. He also believes that allowing existing banks to collapse the holding company structure is a welcome move.

According to the working group proposals, banks currently under NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold. 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. Currently, the holding companies of these banks trade at 40-50 per cent discount to the small finance bank stocks, owing to the holding company discount. The working group’s proposal if accepted can do away with the need to have a holding company when there is only one business (small finance bank) under it.

As regards large corporates, in 2013, the RBI had permitted industrial and business houses to set up banks with certain conditions. While large corporates applied for the licence, only IDFC Bank and Bandhan Bank were allowed to set up banks. The 2014 SFB licensing conditions had barred large corporate/industrial houses from promoting banks.

Banking Regulations Act

The working group has now proposed to allow large corporate/industrial houses, but only after necessary amendments to the Banking Regulations Act 1949 to deal with connected lending and exposures and tightening of supervisory norms. While this is a positive as it will help bring in the much-needed capital into the banking system by players with deep pockets, how this is implemented needs to be seen.

Large NBFCs such as M&M Financial Services, Bajaj Finance, Shriram Transport and Chola Investment and Finance – with assets size of more than ₹50,000 crore – can now consider converting into banks. But the decision will depend on how far these players are willing to compromise on higher returns and comply with stringent regulatory norms, in a bid to garner lows cost CASA deposits, which remains a challenge even for existing banks.

Published on November 20, 2020

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