On November 20, 2020, the internal working group of the Reserve Bank of India (RBI) released its report listing out some recommendations for changes to banking license requirements and the corporate structure of private sector banks in India. The key recommendations of the five-member panel include:
- Entry requirements
- The minimum capital for licensing of new banks should be increased from INR500 crores to INR1000 crores for universal banks and from INR300 crores to INR500 crores for small finance banks.
- Large non-banking finance companies (NBFCs) with an asset size of over INR500 crores and having 10 years of operations should be allowed to convert to banks.
- Payments banks should be allowed to convert to small finance banks within 3 years of operation.
- Structure of banks
- The Non-Operative Finance Holding Company (NOFHC) structure released in 2013 by the RBI as the preferred structure for setting up new banks in India should be used as a standard structure, and all existing banks set up before 2013 should move to this structure. Currently, only two banks are operating as NOFHCs in India, i.e., IDFC First Bank and Bandhan Bank.
- Shareholding pattern
- The panel recommends a uniform cap on shareholding of 15% for all non-promoters and 26% for promoters holding shares over 15 years.
- Large corporates as promoters
- Aside from this, the panel has suggested that large corporates and industrial houses should be allowed to become promoters of banking companies. However, the entry criteria have not been specified in the report.
In our view, some of the recommendations are positive, but the overall focus of the panel on privatization of banks in India may or may not be beneficial, as the banking sector in India is undergoing a major clean-up. Strict RBI oversight and adherence to compliances is the need of the hour.
About the author
Akil Hirani is one of India’s leading corporate lawyers having more than 25 years of experience. Currently, he is the Managing Partner at Majmudar & Partners, a leading Indian law firm, and also heads its transactions practice. Mr. Hirani combines superlative Indian law acumen with an international skill set and has been ranked as one of the most in-demand lawyers in India by Chambers Asia.