RBI releases panel report on corporate structure for private banks

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Reserve Bank of India (RBI), on Friday, released a report on Extant Ownership Guidelines for Indian private sector banks, which was prepared by an Internal Working Group (IWG) appointed by the central bank.

RBI constituted the IWG on June 12, 2020, to review extant ownership guidelines and corporate structure for Indian private sector banks.

According to a statement, the terms of reference for the IWG among other things included a review of the eligibility criteria for individuals/ entities to apply for a banking license, examination of preferred corporate structure for banks and harmonisation of norms in this regard and review of norms for a long-term shareholding in banks by the promoters and other shareholders.

RBI stated some of the key recommendations of the IGW in regards to the guidelines in an official statement. "A cap on promoters' stake in the long run (15 years) may be raised from the current level of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank, a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders and large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and non-financial group entities)," it said.

Well run large Non-banking Finance Companies (NBFCs), with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.

For Payments Banks intending to convert to a Small Finance Bank, the track record of three years of experience as Payments Bank may be considered as sufficient.

"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 '10 years from the date of commencement of operations', whichever is earlier," the official statement read.

The IGW also 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.

In reference to the Non-operative Financial Holding Companies (NOFHC), the IGW said, "NOFHC should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters / promoting entities/ converting entities have other group entities."

While banks licensed before 2013 may move to a NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within five years from the announcement of tax-neutrality.

"Till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries/ joint ventures/ associates need to be addressed through suitable regulations," as per the official statement.

Banks currently under NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold.

"RBI may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. Whenever new licensing guidelines are issued, if new rules are more relaxed, the benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks," the statement concluded.

The IWG report is placed on the RBI website on Friday for comments of stakeholders and members of the public. Comments on the report may be submitted by January 15, 2021, through email. RBI will examine the comments and suggestions before taking a view in the matter.

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