Here are the 21 recommendations out of 33 accepted by RBI on ownership, corporate structure of private banks

#private banks, #RBI

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The Reserve Bank of India (RBI) has accepted 21 out of 33 recommendations made by an internal working group on the ownership and corporate structure of private sector banks.

While the central bank has not accepted the proposal of allowing corporate houses to promote universal banks, it has allowed private sector banks promoters to raise their stakes in their banks. The RBI said the other recommendations are under review and examination.

The 21 recommendations which have been accepted by the RBI are:

1. The initial lock-in requirements may continue as minimum 40 percent stake in the bank for first five years.

2. In the initial five years, there’s no need to fix any cap on the promoters holding.

3. The promoters can raise their stake to 26 percent in the long run. This stipulation will be uniform for all promoters. Promoters who have diluted their stakes below 26 percent can raise their stakes to 26 percent. However, the promoter, if he/she so desires, can choose to bring down holding to even below 26 percent, any time after the lock-in period of five years, RBI said.

4. There are no sub-targets between 5-15 years. At the time of issuance of licenses, the promoters may submit a dilution schedule, which will be examined by the RBI. Banks will have to periodically submit reports on the agreed milestones. However, it is clarified that the submission of a dilution schedule shall be mandatory, RBI said.

5. On non-promoter shareholding, current long-run shareholding guidelines may be replaced by a simple cap of 15 percent all types of non-promoter shareholders.

6. The central bank said it will devise a monitoring mechanism, to ensure that control of promoting entity or major shareholder of the bank does not fall in the hands of persons who are not found to be fit and proper.

7. Pledging of share by promoters during the lock-in period, which amounts to bringing the unencumbered promoters’ shares below the prescribed minimum threshold, has been disallowed.

8. If the shares are pledged and invoked, shares of such bank beyond 5 percent of total shareholding without RBI’s approval may restrict the voting rights of such pledgee till the time the pledgee applies to RBI for regularisation of these shares.

9. A reporting mechanism will be introduced by RBI for pledging of shares by promoters of private sector banks.

10. The RBI may put tighter framework similar to banks for large NBFCs under scale-based regulations.

11. For NBFCs to convert into banks, a track record of 10 years is required. However, for a Payments Bank (PB) intending to convert into a small finance bank (SFB), track record of 3 years of experience as PB may be sufficient, RBI said.

12. Initial capital requirements have been hiked by RBI. For universal banks, it has been hiked to Rs 1,000 crore from Rs 500 crore. For small finance banks, it may be increased to Rs 300 crore from Rs 200 crore and for UCBs transitioning into SFBs, networth should be Rs 150 crore from earlier Rs 100 crore, which has to be increased to Rs 300 crore in five years from present Rs 200 crore.

13. RBI said a uniform usage of the term ‘paid-up voting equity share capital’ shall happen in all guidelines and instructions of Reserve Bank.

14. Non-operative Financial Holding Company (NOHFC) shall continue to be the preferred structure for all new licenses to be issued for Universal Banks. It could be mandatory only in cases where individual promoters/promoting entities have other group entities.

15. 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, RBI said.

16. SFBs which will be set-up in future will require to get listed within ‘six years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘ten years from the date of commencement of operations’, whichever is earlier.

17. Universal banks shall continue to get listed within six years of commencement of operations.

18. The Fit and Proper Criteria as prescribed in 2016 guidelines are appropriate and may be continued. Going forward, a harmonised approach may be adopted in various guidelines, RBI said.

19. For new rules which are relaxed for new licensing guidelines, benefits should be immediately given to existing banks. If new rules are tougher, legacy banks should also confirm to new tighter regulations, but the transition path may be finalised in consultation with affected banks to ensure compliance with new norms in a non-disruptive manner, the RBI said.

20. As other changes recommended by the working group are accepted by the RBI, these should be applicable to existing banks.

21. With licensing on-tap, RBI may prepare a comprehensive document encompassing all licensing and ownership guidelines at one place, providing clear definition. This may be updated from time to time depending on emerging requirements. It will also provide flexibility to the central bank to fine tune the instructions, at a short notice, through small relevant amendment in this document, RBI said.

Recommendations that have been held back and are under examination:

1. The Reserve Bank may examine the issue relating to declassification/derecognition of promoter and consider prescribing norms for the same.

2. On depositories, the RBI may advise banks to seek its prior approval before entering into agreements with depositories in interest of corporate governance.

3. The banks may enter into an agreement with the depository to the effect that the depository shall disclose the list of holders of depository receipts issued by them to the bank. This will also be in compliance with the framework for issue of Depository Receipts’ issued by SEBI, the working group had recommended.

4. The RBI will examine all legal aspects where banks and depositories enter into an agreement.

5. Large corporate/industrial houses may be permitted to promote banks only after necessary amendments to the Banking Regulations Act, 1949.

6. Well run large NBFCs, with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be permitted to convert to banks.

7. The internal working group said with regard to individuals and entities/groups, the provisions of the extant on-tap licensing on universal banks and SFBs are appropriate and do not warrant any change.

8. As the licensing guidelines are now on continuing basis (on-tap), RBI may put a system to review the initial paid up voting equity share capital/net-worth requirement for each category of banks, once in five years.

9. While banks licensed before 2013 may move to an NOFHC (Non-mandatory Non-operative Financial Holding Company) structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from announcement of tax-neutrality.

10. The RBI should engage with the Government to ensure that the tax provisions treat the NOFHC as a pass-through structure.

11. The concerns with regard to banks undertaking different activities through subsidiaries/JVs/associates need to be addressed through suitable regulations till the NOFHC structure is made feasible and operational.

12. For existing small finance banks and payment banks, such banks should be listed ‘within six years from the date of reaching net worth of Rs 500 crore or ‘ten years from the date of commencement of operations’, whichever is earlier.

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