Money & Banking

PSB acquirer will have to meet ‘Fit and Proper’ criteria, says RBI

Our Bureau Mumbai | Updated on February 24, 2021

The new owner should ensure that the bank is well capitalised: Shaktikanta Das

Prospective owners wanting to take over public sector banks (PSBs) will have to meet the Reserve Bank of India’s (RBI) ‘fit and proper’ criteria and ensure that the banks, post- takeover, are well capitalised according to Governor Shaktikanta Das.

This observation comes in the backdrop of Finance Minister Nirmala Sitharaman’s announcement in the Budget that as part of the Government’s “strategic disinvestment and sale” programme it proposes to take up the privatisation of two PSBs.

“It (privatisation of PSBs) is a major reform which the government has embarked upon. So, as the owner of public sector banks, they will decide.

“But, nonetheless, I must add that there is a constant dialogue between the RBI and the Central government,” Das said in an interview to news channel CNBC TV18.

The Governor emphasised that in this privatisation exercise, RBI is directly concerned with two aspects -- one is the ‘fit and proper’ criteria (the new owners should meet this requirement of RBI), and two, RBI would be very keen that the Bank, post takeover, is well capitalised.

And the promoter, who takes over the PSB, should have enough financial strength to capitalise the bank significantly, he added.

Talks with Centre

“Other than that, the approach, etc, these are constantly under discussion and the Government does consult us as and when required. The final call will be that of the government,” Das said.

He observed that amendment to the Bank Nationalisation Act will be required. And the Government is working on that.

As per the ‘Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’, the Reserve Bank issued detailed guidelines in February 2005 on ownership and governance of private sector banks. The broad principles underlying the framework of this policy was to ensure that the ultimate ownership and control of private sector banks is well diversified.

While diversified ownership minimises the risk of misuse or imprudent use of leveraged funds, the fit and proper criteria, were viewed as over-riding consideration in the path of ensuring adequate investments, appropriate restructuring and consolidation in the banking sector.

Per the Report, globally, the regulators give approvals on a case-to-case basis subject to a number of considerations including the overall sectoral impact of the transaction and the satisfaction of ‘fit and proper’ principles by the person/s acquiring the stake, which may inter alia include reputation, financial soundness, credit standing etc.

In case of acquirers being non-individuals, the due diligence may extend even to the parent institution or major shareholders.

Published on February 24, 2021

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