The Reserve Bank of India’s internal working group (IWG) reviewing corporate structure of private sector banks has suggested sweeping changes in bank ownership in its report released on Friday, including allowing large corporate and industrial houses to own banks by amending the Banking Regulation Act, 1949.
The other significant proposal is to allow large non-banking financial companies (NBFCs) with asset size of Rs 50,000 crore and above (including those within the fold of corporate houses), and with a decade’s track record, to convert to banks.
Comments on the IWG’s report are to be submitted by January 15, 2021.
If the recommendations are accepted, this will mark the re-entry of India Inc into commercial banking 40 years after the last round of bank nationalisation in 1980. Many of the biggest industrial groups had aspired for this ever since private players were allowed into banking after 1993.
NBFCs backed by large industrial houses — like Bajaj Finserv, M&M Finance, Tata Capital, L&T Financial Holdings, Aditya Birla Capital, Shriram Transport, Cholamandalam Investments and Finance, and Muthoot Finance — had evinced interest for banking licences in 2012, and will be encouraged by the developments. Rajnish Kumar, former chairman of SBI, said: “It will only work well when system has three things place — strong ring fencing for business interest, high quality corporate governance and resolution framework for banks and finance companies.”
While the report draws attention to some contentious issues such as the threat of group company lending and co-mingling of funds, it states “…IWG recommends that large corporate/industrial houses may be permitted to promote banks only after necessary amendments to the Banking Regulations Act, 1949 to deal with connected lending and exposures between the banks and other financial and non-financial group entities akin to the US Federal Reserve Act in this regard; and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision”.
Though formulating regulations in this regard may take time, the news is noteworthy as it comes a decade after the global financial crisis, after which most developed nations turned cautious on this idea.
The report offers industrial houses two options — either make a straightforward application for a licence, or those that already have lending operations can convert their existing businesses to a bank.
NBFCs have had this option since 2016, but this time around the regulator has gone beyond the usual conditions on eligible promoters and net worth. For the first time it has set a minimum threshold on assets required for conversion at Rs 50,000 crore, apart from the clause that the entity be operational for 10 years.
Abizer Diwanji, EY India Financial Services Leader, says 2016’s on-tap universal licence model received tepid response then because of the apprehension that they were backed by industrial houses. “This time around I expect better participation,” he says. Heads of some of these NBFCs said they would soon convene board meetings to discuss this.
“Some of us are already deposit-taking entities and even without a licence, we operate like a bank,” said the CEO of a highly diversified NBFC. However, another NBFC head said conversion would convince depositors of the safety of their money which they may not have had with an NBFC. “This would be the salient advantage of conversion, though we will also have to look into the cost aspect of the process,” he added.
Among other conditions, NBFCs with diversified operations may be required to adopt the non-operative financial holding company (NOFHC) structure. Therefore, for entities such as Bajaj Finserv, Aditya Birla Capital, and Tata Capital, which also have insurance and asset management operations, rejigging the corporate structure would be a pre-condition for conversion.