RBI keeps Big Business houses out of banking
- The Reserve Bank of India (RBI) has maintained the status quo on the topic of corporate banking entrance.
- The RBI's Internal Working Group (IWG) proposed that large corporate entities be allowed to be bank promoters "only after necessary amendments" to the Banking Regulations Act of 1949, which the central bank opted neither to accept or reject.
RBI’s Internal Working Group
- An Internal Working Group (IWG) was formed by the Reserve Bank of India (RBI) in June 2020 to evaluate existing ownership requirements and corporate structure for Indian private sector banks.
- The IWG's mandate includes a review of the qualifying requirements for persons or businesses seeking a banking licence, among other things.
Banking Regulations in India
Legal framework for banking regulation in India
- The Banking Regulation Act, 1949: The banking business and related financial services are governed primarily by the Banking Regulation Act, 1949.
- The Reserve Bank of India Act, 1934 (RBI Act): It empowers the RBI to issue rules, regulations, directions and guidelines on a wide range of issues relating to banking and the financial sector.
- The Foreign Exchange Management Act, 1999: It governs the cross-border transactions and related activities and provides for (among other things) certain banking and other institutions to be licensed as authorised dealers in foreign exchange.
- The primary banking regulator: The Reserve Bank of India (RBI) is the primary banking regulator in India.having Wide range of Powers to regulate the financial sector.
- Includes prescribing norms for setting up and licensing banks (including branches of foreign banks in India), corporate governance, prudential norms and conditions for structuring products and services.
- An entity intending to carry out banking business in India must obtain a licence from the RBI.
- A licenced banking corporation might engage in auxiliary business such as Borrowing and lending, trade finance, guarantee and indemnity business, financial leasing and hire purchase, and securitization.
- The cap on promoters' stake in the long run (15 years) may be raised from the current level of 15 to 26%.
- Giant corporate or industrial houses may be authorised to become bank promoters only if the Banking Regulation Act of 1949 is amended and the supervisory framework for large conglomerates is strengthened, including integrated supervision.
- After ten years of existence, well-managed major non-banking financial companies (NBFCs) with assets of 50,000 crore or more, including those controlled by corporations, may be evaluated for conversion into banks.
- For New banks, the minimum starting capital requirement should be increased from Rs 500 crore to Rs 1000 crore, and for small financing banks, from Rs 200 crore to Rs 300 crore.
RBI's take on these recommendations
- According to the RBI, 21 of the 33 suggestions have been approved.
- A suggestion to consider major corporations or industrial houses for a banking licence was rejected by the RBI.
- However, it has permitted bank founders to own up to 26% of their banks, which is good news for numerous lenders including Kotak Mahindra Bank, Indusind Bank, Bandhan Bank, and CSB Bank.
- After 15 years, promoters' holdings in private banks can be decreased to 15% under current standards.
- The capital requirement for new applicants was increased from Rs 500 crore to Rs 1,000 crore, which was a crucial recommendation that was accepted.
The possible impact of not Opening Banking space for Big corporates:
- It will help the government avoid accusations that it is selling banks to big businesses. The number of potential purchasers for public sector banks (PSBS) will, however, decline.
- In the absence of a deep-pocketed corporate house, bidders for PSBS would have to be either private or foreign banks, or private equity investors willing to spend a few billion dollars for a bank.
- Private equity investors have the challenge of wanting to depart after a few years, but international banks are gradually reducing their retail banking exposure as compliance costs rise.
- Private businesses (such as HDFC Bank, Kotak, ICICI, and others) have the ability to raise capital, but pension liabilities would be a stumbling block.
- Previously, India's finance minister declared that in the case of privatisation, bank employees' pay and pensions would be protected.
- As a result, these institutions' pension commitments would be a deal breaker, and the fact that the pension is inflation-linked adds to the complexity.
- Integrated Supervision With Amendment of The Banking Regulation Act of 1949 may help in strengthening the supervisory framework for large conglomerates.
- The Ten year threshold could have been more relaxing for the corporate controlled NBFC.