RBI releases panel report on ownership, governance norms of private banks

‘Raise private bank promoter cap to 26%’

RBI Working Group Suggests Converting NBFCs Into Banks, Other Sweeping Changes

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 group also recommended a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank for all non-promoter shareholders.

Reserve Bank of India on November 20 released a report on the internal working group (IWG) recommendations on private bank ownership and corporate structure.

"Where corporate house is a promoter, strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential". IWG said that a track record of three years of experience as payments banks may be considered sufficient.

The panel has also said the voting rights of any single non-promoter be limited to 15 per cent of the voting equity capital.

This view of the panel takes off from the P J Nayak Committee, which was for promoters' holding of 25 per cent as "low promoters' shareholding could make banks vulnerable by weakening the alignment between management and shareholders".

As for non-promoter holding, while it has been proposed that the cap be hiked to 15 per cent, it was opined that "the due diligence process as prescribed in the "Master Directions on Prior Approval, 2015", for shareholding above 10 per cent may be continued".

It also called for strengthening of the supervisory mechanism for large conglomerates, including "consolidated supervision" which means that the RBI could supervise other entities in a group as well to ensure that banking norms are not violated.

The central bank should also continue with the present structure of a non-operative financial holding company (NOFHC) for all new licences issued to universal banks.

To discuss the recommendations, Latha Venkatesh and Shereen Bhan spoke to Sachin Chaturvedi, member of RBI Internal Group; Bahram Vakil, founder & senior partner at AZB & Partners; Abizer Diwanji, partner at EY India; PN Vasudevan, MD & CEO of Equitas Bank; SC Garg, former finance secretary; DK Mittal, former financial services secretary; HR Khan, former deputy governor of RBI and Rajnish Kumar, former chairman of State Bank of India.

"Once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from the announcement of tax-neutrality", RBI statement said.

The RBI's IWG said that the concerns with regard to banks undertaking different activities through subsidiaries or joint ventures or associates need to be addressed through suitable regulations till the NOFHC structure is made feasible and operational.

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".

It recommended the minimum initial capital requirement for licensing new banks should be enhanced from Rs 500 crore to Rs 1,000 crore for universal banks and from Rs 200 crore to Rs 300 crore for small finance banks.

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