RBI bites the bullet, may allow large corporates to own banks

The Reserve Bank of India (RBI) might soon allow large corporate to own banks, something that the banking regulator had so far avoided allowing.

RBI’s internal working group to review extant ownership guidelines and corporate structure for Indian private sector banks has recommended that large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949.

The report by the working group says that for allowing large corporates to own banks, the government needs to amend the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities; and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision. RBI may examine the necessary legal provisions that may be required to deal with all concerns in this regard.

The report also recommends that well-run large Non-banking Finance Companies (NBFCs), with an asset size of ₹50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into 5 banks provided they have completed 10 years of operations and meet the due diligence criteria and satisfy the additional conditions specified in this regard.

Among other major change suggested by the working group is increasing the cap on promoters’ stake from 15% currently to 26%.  The report suggests that  the cap on promoters’ stake in long run of 15 years may be raised from the current levels of 15% to 26% of the paid-up voting equity share capital of the bank. This stipulation should be uniform for all types of promoters and would mean that promoters, who have already diluted their holdings to below 26%, will be permitted to raise it to 26 per cent of the paid-up voting equity share capital of the bank.

However, 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.

As regards non-promoter shareholding, current long-run shareholding guidelines may be replaced by a simple cap of 15 per cent of the paid-up voting equity share capital of the bank, for all types of shareholders.

The working group also recommends disallowing pledge of shares by promoters during the lock-in period, which amounts to bringing the unencumbered promoters’ shares below the prescribed minimum threshold.