PRIVATE SECTOR BANKS REFORMS
CONTEXT:
- The Reserve Bank of India (RBI) had constituted an Internal Working Group (IWG) to review the extant ownership guidelines and corporate structure for private sector banks in India. It was headed by Prasanna Kumar Mohanty, Director, Central Board of RBI.
- The Terms of Reference of the IWG inter alia included review of the eligibility criteria for individuals/ entities to apply for banking license; examination of preferred corporate structure for banks and harmonisation of norms in this regard; and, review of norms for long-term shareholding in banks by the promoters and other shareholders.
THE KEY RECOMMENDATIONS OF THE IWG
- 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); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
- A promoter is an individual or organization that helps raise money for some type of investment activity
- Well run large Non-banking Financial 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 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, track record of 3 years of experience as Payments Bank may be considered as sufficient.
- The minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crore to ₹1000 crore for universal banks, and from ₹200 crore to ₹300 crore for small finance banks.
- Non-operative Financial Holding Company (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.
- Reserve Bank 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, 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.