RBI keeps big business houses out of banking

Reserve Bank of India has not accepted a proposal to consider large corporates or industrial houses for a banking licence. It has however allowed promoters of banks to hold up to 26% in their banks which is a positive for many lenders including Kotak Mahindra Bank, IndusInd Bank, Bandhan Bank and CSB Bank. The new norms allow those who have already diluted stakes to hike their shareholding.

RBI said it had accepted 21 of the 33 recommendations made last year by an internal working group to review extant ownership and corporate structure for Indian private sector banks. A key proposal that was accepted was to increase the capital requirement for new applicants to Rs.1,000 crore instead of Rs 500 crore. 

In November 2020, the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks had said that corporates may be allowed as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949. This would enable RBI to have the power to do consolidated supervision of conglomerates.

It had also said that well-run NBFCs including those owned by corporate houses should be considered for bank licences. Industry insiders speculate that Bajaj Finserv, L&T Finance and Piramal might be the corporate houses still interested in pursuing bank licences. While Bajaj is active in most banking activities, Piramal has acquired DHFL as part of its goal to increase retail business and has bought in a former banker to head its financial services. L&T Finance had earlier declared its intent to pursue a bank licence.

The recommendation had faced criticism from several quarters and RBI too has been uncomfortable to allow business houses into banking. The regulator remained mum on this specific proposal but said that the proposals not accepted are under examination.

One of the proposals not accepted in full was that payments banks be allowed to convert into small finance banks after three years.

Current rules require promoters’ stake in private banks to be diluted to 15% after 15 years. According to sources, RBI agreed to this as the ceiling on the voting rights which a shareholder in a banking company may exercise has been raised by RBI in July 2016 to 26%, which is the level permitted in Banking Regulation Act, 1949 and the new limit aligns with the legislative intent. This is also consistent with the foreign direct investment policy.

Bankers said that a higher limit was required as it will enable promoters to infuse higher funds/capital which is critical for the growth of banks and function as a cushion during distress or a cyclical downturn.

Ashok Hinduja, chairman of IIHL, Mauritius, promoter entity of IndusInd Bank, said the increased promoter holding of 26% will benefit all stakeholders, particularly at this time when Indian economy is poised for exponential growth. 

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