RBI committee suggests allowing corporate, industrial houses to take significant bank stakes

An internal committee of Reserve Bank of India suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949. On eligibility of promoters, it said large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities.

"Large corporate/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 RBI committee suggested.

The committee was formed by the banking regulator in June to review extant ownership guidelines and corporate structure for Indian private sector banks. The group also proposed to raise the cap on promoters' stake in private banks from the current 15% to 26% in 15 years.

Commenting on the recommendation, Rajeev Vidhani, Partner, Khaitan & Co, said, "Once translated into necessary amendments, this will lead to a significant shift in the ownership structure of private sector banks, by allowing new class of promoters and raising cap on long term promoter shareholdings, which are currently restricted to only 15%."

"This of course, as suggested will require introduction of a robust supervisory mechanism for large conglomerates. What is also relevant it that this open doors for large NBFCs to be converted into banks, but what will follow along is stricter regulatory monitoring," he added.

Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks, the committee suggested. "However, it should be mandatory only in cases where the individual promoters/promoting entities/ converting entities have other group entities," it added.

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. While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status. These banks then should move to the NOFHC structure within 5 years from announcement of tax-neutrality.

Reserve Bank may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. Whenever new licensing guidelines are issued, if new rules are more relaxed, benefit should be given to existing banks, the report mentioned.