Wait for bank licence could get longer for large corporate houses

Large industrial houses may not get banking licences from the Reserve Bank of India (RBI) contrary to what was suggested by an Internal Working Group (IWG) in November 2020. The bank regulator is expected to come out with a final report on the issue in 10 days, the Business Standard reported, quoting an unnamed official. The official said that the status quo on the issue may be maintained, the report added.

RBI’s view

RBI is also unlikely to budge from its position that a Non-Banking Financial Company (NBFC) that’s part of a group with assets over Rs 5000 crore in which the non-financial business of the group makes for over 40% of assets in terms of gross income, will not be eligible for the banking operations.

The central bank, however, could be willing to accept grandfather regulations for entities that pass its muster on reserve requirements such as cash reserve ratio, statutory liquidity ratio and on priority sector targets, the BS report mentioned. An exception in such a case was pointed out to be that of the IDBI Ltd-IDBI Bank reverse merger.

After the setting up of the IWG, the hopes of many large industrial houses had gone up in anticipation of being awarded banking licenses. The IWG was mandated to review the extant ownership guidelines and corporate structure for private banks while suggesting a future roadmap.

The IWG submitted its report in November last year listing the benefits and drawbacks awarding banking licences to large industrial houses. A source quoted by the newspaper said that the IWG had touched upon several other aspects of the extant regulatory framework for private banks, while issuing licences was the only part that received attention.

IWG’s findings

Even after the IWG was set up the central bank Governor, Shaktikanta Das, had categorically stated in a statement issued in December last year, that the report of the IWG should not be seen as reflecting the views of the RBI.

According to the financial daily, except one person that the IWG interacted with, among a large group of bankers, legal experts, retired deputy governors of RBI, nobody was in favour of corporate and industrial houses being allowed to promote a bank.

The IWG found that the prevalent view was that the “prevailing corporate governance culture in corporate houses is not up to international standards”, and it might become difficult to limit the non-financial activities of promoters with those of the bank. It was also felt that financial stress on the non-financial business could possibly spill over to the bank. The apprehensions of inter-connected lending were also expressed.

Within the IWG, the paper reported, it was a largely held view that as far as meeting the requirements of capital was concerned, well-governed banks won’t find it difficult to attract capital from other sources than the corporate houses.

The IWG report also mentioned that a substantial increase in regulatory capacity was the need of the hour before allowing corporate or industrial houses to promote banks,.