RBI committee recommends giving banking licence to large corporate or industrial houses

The Reserve Bank of India's (RBI) internal committee has recommended giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949. 

This means that such corporate or industrial houses can take significant stakes, something the Reserve Bank of India had strongly objected to in the past.

The working group committee, which was formed in June to review ownership guidelines and the corporate structure of Indian private sector banks, released its report on Friday.

The group also proposed to raise the cap on promoters' stake in private banks from the current 15 per cent to 26 per cent in 15 years.

On eligibility of promoters, it said large corporate/industrial houses may be allowed as promoters of 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.

Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks, the committee suggested.

'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,' the RBI committee suggested.

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. While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status. These banks then should move to the NOFHC structure within 5 years from announcement of tax-neutrality.

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, the report mentioned.