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The changes could lead to consolidation in the sector (Mint)
The changes could lead to consolidation in the sector (Mint)

Big guns may get banking licences

  • RBI panel suggests giving nod to big industrial houses
  • The changes will require amendments to the Banking Regulation Act

A Reserve Bank of India (RBI) panel on Friday recommended giving banking licences to large industrial houses, potentially allowing the Aditya Birla group, the Tata group and Reliance Industries Ltd to apply for banking licences.

The panel has also suggested that large non-bank lenders with asset sizes of more than 50,000 crore, including those owned by corporates, should be considered for conversion into banks, provided they have completed 10 years of operation. The proposal, if accepted, will make Bajaj Finance Ltd, L&T Finance Holdings Ltd, Shriram Transport Finance Ltd, Tata Capital Ltd and Mahindra and Mahindra Financial Services Ltd prime contenders for banking licences.

Sanjiv Bajaj, chairman and managing director of Bajaj Finserv Ltd, said the proposal is progressive, practical and protective of all stakeholders’ interests.

The recommendations, bankers said, could usher in a fresh wave of consolidation in the sector, where several lenders are struggling to meet minimum capital norms because of a surge in bad loans.

The changes will require amendments to the Banking Regulation Act.

The panel also suggested that payments banks can convert into small finance banks after three years of operations, potentially benefiting Paytm, Jio and Airtel payments banks.

“We welcome the report of the RBI’s internal working group on the ownership guidelines and corporate structure for Indian private sector banks. NBFCs with a proven track record, supported by the brand values of reputed corporates, can play a key role in bringing the benefits of banking and economy to the underserved and newer segments," an Aditya Birla Group spokesperson said.

The panel, headed by RBI executive director P.K. Mohanty, was set up in June to review ownership guidelines and corporate structure for Indian private sector banks. RBI has sought comments on the draft report by 15 January.

The panel also suggested raising the cap on promoter stake in private sector banks to 26% of the paid-up equity after 15 years of operation. Existing norms mandate private bank promoters to cut their ownership to 40% within three years and to 15% in 15 years.

The panel suggested bringing down the promoter holding to below 26% any time after the first five years of lock-in. For non-promoter shareholding, the current long-run shareholding guidelines may be replaced by a simple cap of 15% of the paid-up voting equity share capital of the bank, the committee said.

The move has a direct implication on promoter holding of Kotak Mahindra Bank and IndusInd Bank, where promoter holding has been a contentious issue.

The panel also suggested that a non-operative financial holding company (NOFHC) structure should continue as the preferred route for all new banking licences. Banks currently under NOFHC may be allowed to exit from such a structure if they do not have other group entities in their fold. Banks licensed before 2013 may move to a NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status.

The panel also suggested capping of banks’ investment in any new or existing entity to 20%. However, they may be permitted to make total investments in a financial or non-financial services company, which is not a subsidiary or joint venture or associate up to 20% of the bank’s paid-up share capital and reserves.

The Mohanty panel also recommended harmonizing of various licensing guidelines.

“Whenever a new licensing guideline is issued, if new rules are more relaxed, the benefit should be given to existing banks, immediately. If new rules are tougher, legacy banks should also confirm to new tighter regulations, but transition path may be finalized in consultation with affected banks," the report said.

It suggested increasing the initial paid-up capital or net worth required to set up a new universal bank to 1,000 crore; for SFBs to 300 crore and for urban cooperative bank transiting to SFBs, it is 300 crore in five years.

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