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RBI keeps on hold suggestion to give bank licence to big businesses

  • November 26, 2021

The Reserve Bank of India (RBI) has not yet accepted a recommendation to allow industrial houses to float banks in the country and has kept the non-promoter shareholding capped at 10 per cent for individuals or non-financial institutions.

The internal working group, constituted on June 12 last year under the chairmanship of Prasanna Kumar Mohanty, director, central board of RBI, had suggested in its November 20 report that large corporate, or industrial houses should be allowed in banking after necessary amendments to the Banking Regulations Act.

The RBI, on Friday, also said payments banks must operate for at least five years before applying to become small finance banks (SFB), going against the group’s recommendation of three years of operations as sufficient to graduate into an SFB.

The central bank’s final decision on the “ownership guidelines and corporate structure for Indian private sector banks” saw the central bank not even mentioning the industrial house recommendation. Out of the 33 sets of recommendations by the working group, the RBI accepted 21, partially modifying many. The rest of the recommendations are under examination, the central bank said in a statement. No need to fix any cap on promoters’ holding in initial five years, post which it has to be 40%, recommended the RBI panel.

However, one important decision accepted by the central bank was to allow raising the cap on promoters’ stakes in long run of 15 years to 26 per cent, from the current levels of 15 per cent.

“This stipulation should be uniform for all types of promoters and would not mean that promoters, who have already diluted their holdings to below 26 per cent, will not be permitted to raise it to 26 per cent of the paid-up voting equity share capital of the bank,” the recommendations said, which the RBI accepted.

The RBI, though, struck down another recommendation that the non-promoter shareholding should be raised to 15 per cent for all types of non-promoter shareholders.

The central bank said non-promoter shareholding will continue to be capped at 10 per cent of the share capital in case of natural persons and non-financial institutions but will be allowed up to 15 per cent of the equity share capital of a bank in case of all categories of financial institutions, supranational institutions, public sector undertaking or government.

The central bank also clarified that the extant instructions on the requirement of prior approval of the RBI to acquire shareholding or voting rights of five per cent or more will continue.

The working group’s recommendations, especially giving licences to industrial houses, had created a huge uproar with former RBI governors criticising the suggestions and questioning the need for such a committee at that point.

Former RBI governor Raghuram Rajan and deputy governor Viral Acharya had sharply criticised the central bank’s internal working group (IWG) recommendation.

“Why now? Have we learnt something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no. Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking,” stated Rajan and Acharya’s joint statement, released on Rajan’s LinkedIn handle, in November last year.

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