RBI panel proposes recommendations that could redefine private bank ownership

• The Reserve Bank of India’s (RBI) Internal Working Group (IWG) has proposed 12 changes to ownership guidelines and corporate structure for Indian private sector banks.
• The committee has recommended increasing the cap of promoters’ stake in the long run from the current level of 15% to 26%.
• Other proposed changes include the provision for non-banking financial corporations (NBFCs) to turn into banks, and the possibility of corporates being allowed to become promoters.
  

The Reserve Bank of India’s (RBI) Internal Working Group, formed on June 12 this year, has come out with a set of recommendations that could redefine the face of private bank ownership. Some of the most staggering changes proposed include higher promoter shareholding, the provision for non-banking financial corporations (NBFCs) to turn into banks, and the possibility of corporates being allowed to become promoters.

India’s apex banking institution has granted stakeholders time till January 15, 2021, to submit their suggestions and objections before the RBI takes its final call.

Increasing the level of promoter shareholding
The RBI committee has recommended increasing the cap of promoters’ stake in the long run — that is, 15 years — from the current level of 15% to 26% stake in the paid up share capital of the bank.

For some, this may be a new opportunity; for others, it’s been a long lingering pain point. Billionaire banker Uday Kotak, for instance, has been at odds with RBI to reduce his stake in Kotak Mahindra Bank.

He even dragged the apex bank to the Bombay High Court in December 2018 to argue against the issue of having to reduce his stake to 15%.

Should this regulation be implemented, Kotak will only have to sell 0.1% of his stake to meet the requirement. In June 2020, he sold 2.8% of his share for around ₹6,900 crore bringing his overall holding in the bank down from 28.93% to 26.1%.

IndusInd bank promoters Hinduja brothers will also have the flexibility to raise their stake. They had earlier indicated their wish to pump in more capital. They bought in for over 57 lakh shares at ₹299 crore in September during the bank’s endeavour to raise ₹3,288 crore through peripheral allotment of shares.

When it comes to other shareholders, who aren’t promoters, the committee has recommended that there should be a uniform 15% cap.

Non-banking institutions could be turned into banks
Currently, NBFCs don’t have any way to convert into banks. This means those looking to downsize don’t have an option. And, this applies to all 9,601 of India’s shadow banks. The top 50 account for 80% of the market share when it comes to loans.

While the RBI and regulators, in general, may not want any overlap between shadow banking and commercial banking, the two have invariably deepened their co-dependence.

At the end of the last financial year, NBFCs were the latest net borrowers of funds from the financial system. More than half of these funds were from banks. The liquidity crunch since the IL&FS crisis of 2018 has only added to the cash crunch that NBFCs are facing.

Corporates may be allowed to become bank promoters with the right changes to the Banking Regulation Act
COVID-19 has been tough on the Indian economy. While the pandemic may exacerbate the effects, the country’s economy was already slowing down before that.

Instead of depending on rich bankers to step in, this rule will allow large corporates and industrial houses to become promoters of banks. However, the RBI committee has laid the condition that this could only be allowed once the necessary changes have been made to the Banking Regulations Act.

Other suggested changes laid out by the committee include provisions for payments banks for converting into small finance banks.

They also suggested that small finance banks and payments banks may be listed within six years from the date “of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks” or ten years “from the date of commencement of operations”, whichever is earlier.

The RBI committee is also advocating that the licensing new banks should be enhanced from ₹500 crore to ₹1000 crore for universal banks, and from ₹200 crore to ₹300 crore for small finance banks.

These recommendations from the RBI working group provides a roadmap that could have far-reaching implications for the banking sector. But it will be a while before they come to fruition — if at all.

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