Bank teller of tall stories

Context: Reserve Bank of India’s (RBI’s) Internal Working Group (IWG) submitted its recommendations on several matters regarding bank licensing.

Recommendation of IWG:

• Large Corporate Houses entry into banking: With a continuous infusion of large capital into banks, and the presence of an anchor investor, the confidence of other investors will increase.
• Uniform Cap: of 15% for all types of non-promoter persons and entities; While this provides room for individual and non-financial entities, it also means a restriction for listed financial entities.
• Conversion of Non-Banking Financial Companies (NBFCs): with assets of more than ?50,000 crores into banks.

Issues with the Recommendation:

• RBI’s past oscillating policy on the corporatization of banks: RBI’s policy guidelines for licensing new banks has been oscillating from no restriction during the 1990s to explicit prohibition in early 2000s.
  • After RBI’s on-tap universal bank licensing policy since 2016, there has hardly been any serious application.
• Heavy regulation for Financial Entities: limiting them to 15% from the current 40% may lead to following unintended consequences:
  • A promoter can’t be dislodged (so long as there is no problem with the bank).
  • A lethargic promoter can lead a bank to low-level equilibrium.
  • When there is no promoter, no anchor investor is possible.
  • There will be less opportunities for technical and managerial knowledge-transfer.
• Redundant policy on NBFCs: Current policies fully enable any NBFCs to be eligible for promoting and converting into a bank.
  • As per IWG the ‘consideration’ of and NBFC should be with higher due diligence, leading to a stricter set of regulation for NBFCs as compared to already established banks. 

Way Ahead:

• More Banks of large and small sizes: The need is for more banks of varied sizes, with continuous infusion of capital into banks and the presence of anchor investor with large stakes and deep pockets.
• Extending limit: Anchor investor’s limit should be extended and brought at par to 26% as for promoters;
• Providing an automatic route for a large NBFC to become a bank with criteria such as size and age, regulatory and supervisory comfort, high capitalization, low non-performing assets and profitability.