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Private sector banks reforms

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

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 included:

  1. Review of the eligibility criteria for individuals/ entities to apply for banking license.
  2. Examination of preferred corporate structure for banks and harmonisation of norms.
  3. Review of norms for long-term shareholding in banks by the promoters and other shareholders.

The group has recently submitted its recommendations.

Key Recommendations made:

  1. Raise the cap on promoters’ stake in private sector banks to 26% in the long run (15 years). The holding is currently mandated at 15% of the paid-up voting equity share capital of the bank.
  2. Large corporate or industrial houses should 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).
  3. Improve the supervisory mechanism for large conglomerates, including consolidated supervision.
  4. Also, well-run non-banking financial companies (NBFCs), with an asset size of ₹50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations, meeting due diligence criteria and compliance with additional specified conditions.
  5. As regards non-promoter shareholding, it has suggested a uniform cap of 15% of the paid-up voting equity share capital of the bank for all types of shareholders.
  6. For Payments Banks intending to convert to a Small Finance Bank (SFB), their track record of three years should be considered sufficient.
  7. Small Finance Banks and Payments Banks may be listed within ‘6 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.
  8. The minimum initial capital requirement for licensing new banks be enhanced from ₹500 crore to ₹1,000 crore for universal banks, and be raised to ₹300 crore from ₹200 crore for SFBs.
  9. 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 or converting entities have other group entities.

InstaLinks:

Prelims Link:

  1. What are Payment Banks?
  2. What are NBFCs?
  3. What are SFBs?
  4. Key recommendations made by the IWG.

Mains Link:

Discuss the significance of these recommendations.

Sources: the Hindu.