RBI had constituted an internal working group on 12 June to review extant ownership guidelines and corporate structure for Indian private sector banks. The internal working group of Reserve Bank of India (RBI) suggested that large Non-Banking Financial Company (NBFCs) can convert into banks if they fulfill certain criteria.
India has 9,601 shadow banks, of which the top 50 account for 80% of market share by loans. Between 31 March 2009 and 31 March 2019, the total assets of NBFCs grew at a compounded annual growth rate of 18.6%, while the balance sheets of scheduled commercial banks grew at a rate of 10.7%. The aggregate balance sheet size of NBFCs increased from 9.3% to 18.6% of the aggregate balance sheet size of scheduled commercial banks during the corresponding period. In absolute terms, the asset size of the NBFC sector (including housing finance companies), as on 31 March, 2020, is ₹51 lakh crore. The banking regulator has increased its vigilance over the NBFC segment following high growth in the last decade.
"This is a long pending and welcome move from the RBI. In fact we believe that the RBI working group shouldn't just be focussed on large NBFCs but look at all the NBFCs especially those with a strong technology backbone so that the conversion to banks will fuel the expansion of the banking services to previously under-served and unserved customer segments," said Anil Pinapala, CEO, Vivifi finace India private limited.
Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP, said, "Though the RBI committee recommended for conversion of NBFCs into banks, there have been reports in the past that the Board of Financial Supervision of RBI has in principal decided not to issue fresh licenses for next couple of years. Further, in the past as well, NBFCs which got converted into banks faced issues in terms of higher provisioning for legacy NPAs,"
Payments banks with three years of experience can be eligible for conversion into a small finance bank, the Reserve Bank of India's panel suggested.
"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," the internal working group said.
Sandeep Wirkhare, MD & CEO, ISFC said, "Given the under penetration of credit and diversity of segments that we have in India there is a huge opportunity to even look at segment specific small finance banks. Education, healthcare and agriculture are the segments that need specialised approach to the lending so that credit reaches to the most deserved and creates an impact in these segments."
The group also suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949. "The cap on promoters’ stake in the long run may be raised from the current level of 15% to 26% of the paid-up voting equity share capital of the bank," RBI panel said.
The key recommendations of the Internal Working Group (IWG) are as follows:
- The 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.
- As regards non-promoter shareholding, 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.
- 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.
- Well run large Non-banking Finance 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.
- 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.
- 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.
- While banks licensed before 2013 may move to an 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 5 years from 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.
- 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.
- 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.
The report is placed on the RBI website today 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.
Source: rbi.org.in ; LiveMint