The good and not so good of new bank ownership norms

News: RBI’s internal working group, set up in June 2020, had made 33 recommendations on the ownership and corporate structure of private sector banks.

The RBI has accepted 21 of them, with minor modifications in some cases. The rest, are under examination.

What are the key recommendations made by the RBI’s IWG?

Entry of corporate and large non-banking financial companies into banking: IWG recommended that large corporates and industrial houses be allowed as promoters of banks but only after necessary amendments to the Banking Regulation Act, 1949.

Changes in Promoter’s shareholding in a bank: A promoter can hold at least 40 per cent stake for the first five years and by the 15th year, it can be reduced to 26 per cent. All intermediate sub-targets between five and 15 years have been removed.

Changes in Capital requirement for universal banks, SFB’s and cooperative banks: Capital requirement for universal banks has been raised to Rs 1,000 crore from Rs 500 crore and that of SFBs, to Rs 300 crore from Rs 100 crore.

For an urban cooperative bank that wants to transform itself into an SFB, it will need to bring in Rs 150 crore capital, but in five years the capital must be doubled.

Recommendation regarding the Corporate structure of a bank: Non-operative financial holding company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks where the promoters have other companies under their fold.

However, existing banks, which have been following the NOFHC structure, could be allowed to exit from such a structure if they do not have other business entities within the group.

Timeframe for listing: The new SFBs are required to be listed within eight years from the date of commencement of operations, but for the universal banks, the timeframe for listing is six years.

Harmonisation of Different Licensing Guidelines: IWG recommends for a comprehensive document on the licensing and ownership guidelines, making all norms equal for legacy as well as the new banks.

The criteria for selecting CEOs: The call for a monitoring mechanism to ensure that control of a bank doesn’t fall in the hands of persons who are not found to be fit and proper is welcome.

However, the observation that the existing criteria to assess the ‘fit and proper’ status of promoters are appropriate and may be continued is a cause of concern

Why the continuation of the ‘fit and proper’ status of promoters is not welcomed?

Recent developments in some banks in India put the spotlight on role of the board of banks, the CEO, corporate governance and conflict of interest.

In this context, it is necessary for RBI to scrutinise appointment of CEOs and the role of the board of the banks. But the Banking Regulation Act has only given limited powers for RBI in this regard. For instance,

One, The Banking Regulation Act empowers the RBI to supersede the board of directors of banks in public interest. But this is only for a period not exceeding six months.

Two, The RBI’s prior approval is a must for the appointment and reappointment of the CEO. Further, the central bank could seek the CEO’s removal also. But the Act doesn’t specify what qualities a CEO should possess apart from solvency.

So, the existing measures are not enough. It is time to review the ‘fit and proper’ criteria for banking licence, particularly with reference to individual CEOs.

Source: This post is based on the article “The good and not so good of new bank ownership norms” published in Business Standard on 13^th Dec 2021.