11.8 C
New York
Wednesday, March 3, 2021
Home Stories With This New Approach Of the RBI Committee, We May Soon Have...

With This New Approach Of the RBI Committee, We May Soon Have Reliance Bank Of India & Adani National Bank!

In a major shift in stance by the RBI, an internal working group has come up with several proposals that would allow corporations, business magnates, and large industrial organizations or groups to operate banks. This may be subject to change in the Banking Regulation Act. 

Currently, the legislation does not allow any large industrial company to have promoter control over private banks.

Under these circumstances, large Indian industrial groups are defined as companies with assets exceeding Rs 5000 crore, and 40% or more of their revenue or assets come from non-financial businesses.

The group pointed out these concerns in the report, saying: The IWG was aware that the Reserve Bank’s approach to the ownership of banks by large companies/industrial companies is largely prudent, because of serious risks, governance concerns, and conflicts of interest that may have arisen when banks are owned and controlled by large corporate and industrial houses.

In the past, the RBI has been highly reluctant to let all large industrial houses to promote banks.

In the previous rounds, when the Reserve Bank of India (RBI) issued private banking licenses, the banking regulator had allowed corporate institutions to apply but rejected their applications, and gave priority to financial institutions with banking transaction experience.

That approach seems to be changed now.

The IWG ( internal working group) has come up with its main proposal to allow large NBFCs (non-banking financial companies) to convert into banks. 

The proposal comes from its report on the structure of India’s private banking sector.

Promoter Holding

More suggestions include increasing the shareholding ratio of promoters from 15% of paid-up voting equities to 26%, and the threshold for converting non-bank financial companies (NBFC) and payment banks into formal banks and small finance banks (SFB), respectively.

This seems to be an attempt to reach a consensus on the percentage of shares that private bank promoters can ultimately hold.

Focus on NOHCs

Besides this, it also recommends how the bank can be held by a promoter through NOHC (non-operative financial holding company) as well as guidance on how to list companies.

The IWG (internal working group) stated that for all new licenses issued for universal banks, NOFHC should continue to be the preferred structure. The group said, however, it should only be mandatory if the individual promoter/promoting entity/conversion entity has other group entities.

According to the report, although banks licensed before 2013 may decide to adopt the NOFHC structure at their own discretion, once the NOFHC structure obtains tax neutral status, all banks licensed before 2013 will be converted to the NOFHC structure within 5 years after declaring tax neutrality.

Until the NOFHC structure becomes feasible and operational, concerns about banks carrying out different activities through subsidiaries/joint ventures/associated companies need to be resolved through appropriate regulations. 

In addition to this, if the bank currently under the NOFHC structure does not fall under other group entities, it can be allowed to withdraw from such a structure.

However, the proposal comes with certain riders.

According to the IWG’s proposals, only after the necessary amendments to the Banking Regulation Act of 1949, large companies/industrial organizations can be allowed to act as promoters of banks.

The purpose of this is to prevent related loans and exposures between banks and other non-financial and financial group entities and to strengthen the supervision mechanism for large groups, industries, including consolidated supervision.

Big Business Tycoons & Large Companies To Enter The Banking Sector

Although the central bank seems to be suggesting that it is open to large companies that own banks, it also recognized concerns about the increased risk of inapt or misallocated lending, the concentration of power, associated loans, and intensified risks on industrial houses that might enter the private banking sector.

However, the report also pointed out that their participation can bring capital, expertise, and strategy to the banking sector. Furthermore, internationally, only a few jurisdictions prohibit companies from explicitly participating in banking.

Therefore, the IWG proposes to amend the Banking Regulation Act to facilitate its entry subject to more powerful and effective regulatory norms.

With this approach, we may soon have new banks, such as Reliance Bank of India and Adani National Bank.

NBFC To Full Banks and Payment Banks To SFBs

The group also recommends that companies that provide specific financial services-NBFCs and payment banks or shadow lenders-can increase the structural ladder to become full banks, and SFBs respectively.

It suggests that a well-run large-scale NBFC (even if it is operated by a corporate house) with assets over Rs. 50,000 crore- could convert to the full universal bank-if it has completed ten years of operation and meet due diligence standards with more stringent, bank-like regulations for such NBFCs.

This will also help many corporate firms running NBFCs under their fold to become banks if they wish to do so.

It means that business tycoons such as Mukesh Ambani, an Indian billionaire, the chairman & managing director, and the largest shareholder of Reliance Industries Ltd. (RIL), may soon enter the banking sector. We may soon have Reliance Bank of India or small finance banks like Jio Payment Bank.

After three years of operations, payment banks (such as Jio, PayTM, Airtel, and India Posts) can be converted into small finance banks.

The IWG also recommends that the funds required to obtain a banking license should also increase, and RBI should review them every five years:

  • For urban co-operative banks to small finance banks, initially ₹150 crores which should be increased to ₹300 crores in five years.
  • ₹300 crores from ₹200 crores for small finance banks.
  • ₹1,000 crores for full banks from ₹500 crores.

In addition to this, last time (2013-14), when the Reserve Bank of India invited applications for new private banks, at that time big corporate houses like Tata Sons; L&T Finance Holdings, part of India’s largest engineering conglomerate Larsen & Toubro; the Aditya Birla Nuvo, part of the Aditya Birla conglomerate; Reliance Capital; and INMACS Management Services Ltd, which provides management consulting, corporate finance, auditing, tax, and legal consulting services, had applied for a license.

But only IDFC and Bandhan got the license.

Since liberalization, RBI has issued licenses in three rounds

Since liberalization, the Reserve Bank of India has issued banking licenses in three rounds. In the first round in 1993-94, the Reserve Bank of India granted licenses to 10 private sector banks. These banks are HDFC Bank Ltd, Global Trust Bank Ltd, UTI Bank Ltd (renamed Axis Bank Ltd), ICICI Bank Ltd, Bank of Punjab, IndusInd Bank Ltd, IDBI Bank Ltd, Times Bank, Centurion Bank Ltd, and Development Credit Bank Ltd.

In 2003-04, two more banks were permitted: Yes Bank Ltd and Kotak Mahindra Bank Ltd. In 2014, Bandhan Bank and IDFC First Bank obtained licenses.

In each round, different guidelines regarding capital norms and ownership guidelines lead to confusion on appropriate rules. In this context, IWG proposals are important.

The proposal explicitly stated that the Reserve Bank of India should take measures to ensure harmonization and uniformity in the different licensing guidelines to the extent possible.

Whenever new licensing guidelines are issued, if the new rules are relaxed, the existing banks should be benefited. If the new rules are more stringent, the legacy banks should also comply with the new and severer rules, but it can provide an uninterrupted transition path to affected banks, its report stated.

The IWG Group’s recommendations address some controversial issues regarding the ownership norms of private banks.

There were scuffles between the promoters of private banks and regulators over the promoter holding. Kotak Mahindra Bank, a private sector lender, had brought the regulator to court over a dispute on promoter Uday Kotak’s holding.

The Reserve Bank of India let the promoters, Uday Kotak and family, retain a 26% stake, but capped the voting rights at 15%.

Similarly, the Reserve Bank of India had taken some punitive measures against Bandhan Bank for failing to reduce the promoter’s holdings. After the bank complied with the regulations, the restriction was lifted.

Ultimately, this means that banking will no longer be restricted or more stringent to the top few names you keep hearing of. All they need to do is to comply with RBI regulations. So, business magnates like Mukesh Ambani have a clear path to open a bank in India.

 

- Advertisment -

Most Popular

Recent Comments

%d bloggers like this: