Acceptance of some of the suggestions of ‘Report of the Internal Working Group (IWG) to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ heralds the expansion of banks in India.

The corporate sector’s entry into banking may have to wait as it is still under systemic risk evaluation. Permitting NBFCs with 10-year track record to convert into universal banks and after five years into small finance bank (SFB) is a significant move towards dense banking presence. The RBI was stringent in not allowing any dilution in the period from five years to three years, for conversion of payment banks into SFBs.

To become banks, NBFCs will have to substantially upgrade risk management systems. Accordingly, the RBI while adopting new scale-based regulations is set to prescribe tighter bank-like regulatory framework for large NBFCs, for which they will have to train their staff. But it can potentially trigger systemic risk if NBFCs do not groom their human resources to manage the kind of risks they would be exposed to operate as a bank. Similarly, when urban cooperative banks are upgraded as SFBs, their manpower and internal control mechanism will have to be improved to cope with the nuances of elevated risks. If the new genre of banks are not equipped with appropriate risk management skills can cause collateral damage to the financial system.

Advantage new entrants

The new relaxed stake holding pattern for promoters will encourage new applicants to set up banks. The promoter’s stake currently capped at 15 per cent is raised to 26 per cent of paid-up ‘voting equity share capital’ in the long run.

In quick response Hindujas are ready to pump in US $1.1 billion into IndusInd Bank Ltd and some more stakeholders may follow. But there is a fine print that if promoters’ stake is already diluted, it cannot be raised back to 26 per cent. But new entities will have to submit stake dilution schedule from 40 per cent to 26 per cent.

However, non-promoter shareholding will be capped at 10 per cent of the paid-up voting equity share capital of the bank in case of natural persons and non-financial institutions/entities and at 15 per cent in case of all categories of financial institutions/entities.

Pledge of shares by promoters during the lock-in period amounting to bringing the unencumbered promoters’ shares below the prescribed minimum threshold, should be disallowed. Voting rights of such pledgee shall be restricted to 5 per cent till the pledgee obtains permission of Reserve Bank for regularisation of acquisition of these shares.

RBI has outlined the need to increase capital base as risks in banking are set to expand with huge inter institutional dependencies and linkages. Accordingly, the initial ‘paid-up voting equity share capital’/net worth required to set up (i) a new universal bank, is increased to ₹1,000 crore (from ₹500 crore). (ii) For SFBs to ₹300 crore from ₹200 crore (iii) For Urban Cooperative Banks (UCBs) to convert into SFBs it’s now ₹150 crore (from ₹100 crore), which needs to be gradually increased to ₹300 crore in five years.

This enhanced capital base for all categories of banks will improve their risk absorption and lending capacities. With Basel – III norms in place from October 1, 2021, banks will have to be risk conscious and raise capital levels in sync with the business mix.

The conflict of interest among group entities is addressed by adopting a corporate structure based on Non-Operative Financial Holding Company (NOFHC). It is made mandatory only for entities where the individual promoters/promoting entities/converting entities have other group entities. Banks currently under NOFHC will be allowed to exit from the structure if they do not have other group entities under their fold. All new norms will apply for new applicants from November 26, 2021. Applications received before this date will be processed in terms of earlier norms. A road map for raising the capital levels for existing banks and those to be considered prior to the cut-off date will be prescribed. Thus, old applicants are provided benefit of entry level capital needs that was in force at the time they made the application.

For listing SFBs will be allowed eight years instead of six recommended by IWG. But universal banks shall continue to be listed within six years of commencement of operations providing enough time to conform to new tighter regulations.

The writer is Adjunct Professor, Institute of Insurance and Risk Management – Hyderabad. Views expressed are personal

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