What are the key recommendations of the Internal Working Group (IWG) constituted by RBI?
The Internal Working Group (IWG) of the RBI in a progression of recommendations has suggested the guarded entry of corporate houses into the banking space, conversion of NBFCs into banks and Payments Banks into SFB, hike in promoters’ stake amongst others. The committee also sought comments on its recommendations from stakeholders and members of the public.
On 12 June 2020, RBI constituted IWG headed by PK Mohanty to audit extant ownership guidelines and corporate structure for private sector banks of India. The Terms of Reference (ToR) mentioned in the IWG inter alia included the eligibility criteria for individuals or 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 a long-term shareholding in banks by the promoters and other shareholders.
Key recommendations of IWG:
1- Entry of Corporate Houses into the Banking Sector
The entry of corporates into the banking space may be allowed only as 'promoters' after necessary amendments to the Banking Regulation Act of 1949 to prevent connected lending and exposures between the banks and other financial and non-financial institutions due to their poor governance and credit disbursement.
The cap on promoters’ stake in the long run (15 years) may be raised from 15% to 26% of the paid-up voting equity share capital of the bank. On the other hand, for non-promoter shareholding, the committee suggested a uniform cap of 15% of the paid-up voting equity share capital of the bank for all types of shareholders, the committee suggested.
Promoter helps the banks to raise money for some type of investment activity.
2- Conversion of NBFCs into Banks:
As per the panel, large NBFCs with an asset size of ₹50,000 crores and above, including those owned by corporate houses, may be considered for conversion into banks subjected to the required criteria and completion of 10 years of operations in compliance with additional conditions specified in this regard.
3- Conversion of Payments Banks into SFB
For Payments Banks intending to convert to a Small Finance Bank (SFB), a minimum of 3 years of experience as Payments Bank may be considered as sufficient, the group recommended.
They are like any other banks but operate on a smaller scale. For example, Airtel Payments Bank, India Post Payments Bank and so on.
Small Finance Banks (SFB)
These are the financial institutions facilitating financial services to India's unserved and unbanked region. For example, A U Small Finance Bank, ESAF Small Finance Bank, and so forth.
As per RBI, Small Finance Banks and Payments Banks may be listed either ‘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.
4- Minimum Capital Requirement for New Banks:
The panel suggested raising the minimum initial capital requirement for licensing new banks from current ₹500 crores to ₹1000 crore for universal banks and from current ₹200 crores to ₹300 crores for small finance banks.
Universal Banks combines three major banking services, wholesale banking, retail banking, and investment banking under one roof. For example, HSBC, Deutsche Bank, and so forth.
5- Continuation of NOFHC
According to the suggestions by the panel, 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.
It must be noted that banks licensed before 2013 may move to a NOFHC structure at their discretion and banks licensed before the said date shall move to the NOFHC structure within 5 years from the announcement of tax-neutrality. Also, banks which are 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.