Converting NBFCs to banks

The RBI Working Group has actually formalized a suggestion that RBI has been making for some time. It suggests to convert any large profit making NBFC with assets of over Rs.50,000 crore into a full-fledged bank. This will submit all important financial intermediaries to the same level of central bank regulation as the scheduled banks to reduce systemic risks to the financial system. RBI has not been comfortable with NBFCs that managed billions and command huge market caps, not being regulated on capital adequacy, transparency as well as on asset classification norms. 

Bank promoter stake

This is an interesting proposal that is apparently driven by recent cases like Bandhan Bank and Kotak Bank. The RBI Working Group proposes to allow the promoters of private banks to have a minimum holding of 26% in the bank instead of the current limit of 15%. In the case of Kotak Bank and Bandhan Bank, the promoters had to cut down their stake drastically. The new proposal may mean that in many of the private banks, the promoters will not have to cut any further stake from these levels.  

Allow corporates in banking

This is, perhaps, the biggest shift if it gets accepted and ratified in Parliament as it will require amendments to the Banking Regulations Act. For long, the RBI had avoided giving banking licenses to corporate groups like the Tatas, Birla, Bajaj, Mahindra etc. The idea was that it could lead to a conflict of interest where a banker and a big customer could be part of the same group. Obviously, the RBI Working Group now feels that the stringent regulations, monitoring levels and the checks & balances are good enough to pre-empt such situations. If this is permitted, it could start with most of these business groups converting their relatively large financial services franchise into a bank. That could be an interesting and significant development. 

In sync with proactive approach

In a way, the recommendations of the RBI Working mark a departure from the old approach. Even as the RBI will rely increasingly on the financial system self regulating itself, there simultaneously will also be a more proactive thrust. In the recent past, we have seen the RBI has intervened to rescue Yes Bank from the verge of default, superseded the top management of LVB, worked out a merger deal with DBS Bank and has now initiated special audit of SREI Infra to prevent a potential default. Clearly, the RBI is adopting a new approach and the Working Group is fully in sync! ©