RBI suggests conversion of large corporate financial houses into private banks


Team Infinities:

Reserve Bank of India panel submitted a report to allow large corporate and industrial houses to back private banks after amendments of Banking Regulation Act on November 20, which is aimed to prevent risk and strong lending among group companies.

The RBI committee has put some rules and regulation to get the license and also recommended that after 15 years private bank should allow corporate promoters to hold up to 26% instead of current capital of 15%.

To provide the further flexibility to promoters of private banks there will not be any intermediate sub targets between 5-15 years may required for reduction in shareholding. Currently there are three private lenders with over 26% promoter holding.

Further more, non banking finance companies (NBFCs) who acquired over 50,000 crores and ten years of track record may be allowed to convert into banks. It also made easier for payments banks to convert to small finance bank (SFBs) by reducing track record to three years to five years.

The committee has also proposed to review the “fit and proper norms” through which RBI will decide to allowing or rejecting application to get the bank license, earlier RBI was selective about the matter. The panel wanted the minimum initial capital requirement for licensing new banks to be doubled from Rs 500 crores to Rs. 1,000 crores for universal banks, and from Rs. 200 crores to Rs. 300 crores for SFBs.

Clearly, the all banking landscape is all set up for a big change. The public sector banks are already consolidated with 6-7 large banks with balance sheet size of over Rs 10 lakh crores. If RBI allows the large industrial houses to convert their NBFCs to full-scale banks, they straightaway will be bigger than many mid-sized banks. But after failing of IL & FC Dewan Housing Finance Corporation Limited proved that asset liability mismatches could create problem for entire financial services sector as there all link with bank, mutual fund and insurance companies. So before giving the permission it must be checked the growth of large NBFCs, besides this, failure of Laxmi Vilas Bank is also an example alarming to take the final decision of large corporate houses conversion into bank.  

It would help the banking sector to expand its services in the country while getting the stipulated investment from the corporate house. The decision of the RBI regrading ownership of banks by large corporate houses is a cautious one in view of serious risks that when bank is controlled by large corporate houses then conflict may happen in interest rate. It would create another issue that regulator mandate to have disturbed ownership by the dominance of family led business in the country. The changes come against the backdrop of putting the Indian economy on the path of last growth which could not be possible without strong credit institutions. Though group has also ensured that the RBI takes steps to maintain harmonization and uniformity in different licensing guidelines.




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