In a move that can pave the way for a major overhaul of the ownership structure of private banks, an Internal Working Group of the RBI has proposed allowing large corporates  to promote banks but with legislative safeguards. It has also suggested increasing the cap on promoter stake after 15 years of operation to 26 per cent from 15 per cent currently.

On allowing large corporates to promote banks, the Reserve Bank Working Group, however, advocated a cautious approach and highlighted the need for a strong legal framework to address connected lending issues and suggested an enabling framework for consolidated supervision.

Its report said: “Large corporate and industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and non-financial group entities); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.”

The Working Group, chaired by RBI Central Board Director PK Mohanty, was set up on June 12  to review extant ownership guidelines and corporate structure for  private sector banks. A large corporate, industrial or business house, in this context, means a group having total assets of at least ₹5,000 crore, where the non-financial business of the group accounts for more than 40 per cent in terms of total assets or gross income.


Promoter stake

On the issue of promoter stake, the Working Group suggested raising the cap in the long run (15 years) to 26 per cent of the paid-up voting equity share capital of the bank.

“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. The promoter, if he or she so desires, can choose to bring down holding to even below 26 per cent, any time after the lock-in period of five years,” it said.

Under the current RBI norms, promoters of private banks have to reduce their stake to 40 per cent within three years of operations and then to 15 per cent in 15 years.

“As regards non-promoter shareholding, 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,” it  said.

‘Forward-looking report’

Kuntal Sur, Partner, Financial Risk and Regulation, PwC India, said it is a very comprehensive and forward-looking report. “It touches on most aspects that have been of concern. Significantly, it has also looked into one of the most critical aspects — corporates getting a banking licence — and is setting the ground rules for debate and discussion.”

The report has also recommended that well-run large NBFCs with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations.

FICCI president Sangita Reddy said, “Amongst the various suggestions made, two in particular stand out. First relates to allowing large corporates and industrial houses as promoters of banks. FICCI had been advocating this for long.  Second is the recommendation related to allowing well-run large NBFCs, with an asset size of ₹50,000 crore and above, including those owned by a corporate house, to be converted into banks. This had been a key  task of the FICCI NBFC Committee as there is a clear need for large NBFCs to have a defined growth path that would allow them to both support greater economic activities as well diversify their sources of funding.”