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| Updated on: Dec 01, 2021
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RBI’s decision to clear the air on ownership and control norms for private banks is a good move

Banking is one of the very few sectors in India still subject to a licensing regime. The Reserve Bank of India has often been criticised, not just for setting overly stringent eligibility criteria that pose formidable entry barriers to new aspirants, but also for frequently shifting goalposts on the desirable ownership structure and shareholding for established players. The RBI’s decision to selectively adopt the recommendations of its Internal Working Group (IWG) to streamline licensing, ownership and control norms for private banks is therefore a welcome reform move.

RBI regulations have so far appeared quite conflicted, on whether it prefers high promoter skin-in-the-game in private banks to ensure good governance or favours widely dispersed shareholding to check promoter influence. Extant regulations try to do a bit of both, by mandating that private bank promoters hold at least a 40 per cent equity stake in the first five years, but dilute their voting rights to below 20 per cent and 15 per cent within 10 and 15 years, respectively. Private banks promoted at different times are subject to different rules, leading to some promoters using non-equity routes to infuse capital and others legally challenging the regulator on the inconsistency of its rules. IWG recommendations now adopted by the RBI clear the air, by requiring all private bank promoters to hold a minimum 40 per cent equity stake in the first five years while diluting to 26 per cent within 15 years. These norms, by enforcing fairly high skin-in-the-game for promoters throughout the bank’s life, will facilitate timely equity infusions for stressed banks. But to ensure that individuals don’t exercise undue influence over lending decisions, high promoter stakes may need to be counter-balanced by stronger bank boards and compliance functions. The RBI’s decision to insist on a 10-year track record and initial capital requirement of ₹1,000 crore (instead of ₹500 crore) for aspirants to universal bank licences, will help weed out non-serious players and allow only entities with sufficient fund-raising ability into the fray.

While adopting the IWG’s views on promoter holdings and organisational structure of banks, it is noteworthy that RBI hasn’t taken a call on its most hotly debated recommendation — that of offering bank licences to large corporates, industrial houses and NBFCs. But the regulator may not be wrong to bide its time on this contentious decision. Most banking frauds in India have had their origins in connected lending and diversion of funds to group entities. Both internal checks such as statutory audits, and external ones such as RBI’s supervisory mechanism, have so far proved unequal to detecting such cases early. Having recently taken on the oversight of co-operative banks, small finance banks and proliferating digital lenders in addition to legacy universal banks, the RBI today has its hands full in terms of regulatory capacity. It is therefore pragmatic of the regulator to want to set its own house in order, before inviting unknown entities into it.

Published on December 01, 2021

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