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The Reserve Bank of India (RBI) has kept in abeyance a recommendation by an internal panel to give banking licences to large business groups, while allowing promoters to own up to 26% in private banks.

On Friday, RBI said it had accepted 21 recommendations with some modifications of the 33 proposed by the committee in November last year. One of the most contentious proposals made by the five-member panel was to allow large corporate houses to act as promoters of banks after amendments to the Banking Regulation Act. Last year, experts pointed out that RBI would face challenges in supervising non-financial sector entities, and supervisory resources could be further strained.

While not accepting this recommendation and some other suggestions, RBI said the remaining are under examination. However, the plan to offer large corporates to set up banks faced wide criticism, with experts and even former central bank governor Raghuram Rajan warning against it.

“Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no. Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking," Rajan and former deputy governor Viral Acharya wrote in a LinkedIn post in November last year.

Asked about the recommendation, governor Shaktikanta Das told reporters on 4 December 2020 that it is a report by an internal working group of RBI and should not be seen as RBI’s point of view or decision.

“That has to be very clearly understood. The internal working group had two external members, who are also members of the RBI central board and the internal working group has acted independently, they have had their independent deliberations, they have given a certain point of view," Das said.

Meanwhile, RBI accepted the recommendation to increase the cap on promoters’ stake in the long run of 15 years to 26%, from 15% at present. This stipulation will be uniform for promoters and, therefore, promoters who have diluted their holdings will be permitted to raise it to 26%. Existing rules mandate private bank promoters to lower their holding to 40% in three years, 20% within 10 years, and 15% within 15 years of obtaining a banking licence.

“The promoter, if he/she so desires, can choose to bring down holding to even below 26%, any time after the lock-in period of five years," RBI said, adding that the lock-in clause, which states promoters must hold at least 40% stake in the bank for the first five years, remains unchanged.

While there are no sub-targets for stake dilution for promoters between five to 15 years, they will have to submit a dilution schedule at the time of issuance of licence. RBI also said non-promoter shareholding will be capped at 10% for “natural persons and non-financial institutions" and at 15% for “all categories of financial institutions, supranational institutions, public sector undertakings or the government".

After a disagreement over what constituted a reduction in promoter holding, Kotak Mahindra Bank moved the Bombay high court with a writ petition in December 2018. However, last January, the bank and RBI reached an agreement under which promoter Uday Kotak agreed to gradually reduce his stake, which was brought down to 26% by August last year.

“IndusInd Bank will be the biggest beneficiary of the change as promoters are looking to raise their stake in the lender and have been seeking RBI permission. We might see some additional investment from the promoters soon," said Asutosh Mishra, head of research (institutional equity) at Ashika Stock Broking.

Mishra said that for private lender Bandhan Bank, the impact would be that they can now collapse the non-operative financial holding company structure.

The central bank has also accepted suggestions regarding increasing the minimum initial capital required to set up banks. For instance, the initial paid-up voting equity share capital or net worth required to set up a new universal bank will be doubled to 1,000 crore. It will be raised to 300 crore from 200 crore at present for small finance banks.

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