RBI working group recommends allowing well-run, large NBFCs to become banks

Darnell Taylor
November 21, 2020

Also, nearly all the experts were of the view that the present prescription of listing within six years from commencement of operations, for universal bank in the "on-tap" licensing guidelines can be followed uniformly including small finance banks, which had been given only three years from reaching networth of Rs 500 crore, the report noted.

The recommendations also included provisions for payments banks intending to convert to small finance banks. NBFCs don't accept demand deposits; they do not form part of the payment and settlement system and can't issue cheques drawn on itself; deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

India's banking sector could be in for an overhaul if the RBI implements a report authored by its internal working group on private bank ownership.

The IWG, set up in June, has also suggested that large corporate or industrial houses be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and exposures between the banks and other financial and non-financial group entities); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.

Also, those banks now 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.

As on March 31, 2020, the asset size of India's NBFC sector, including housing finance companies, stood at 688 billion US dollars.

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The committee has also recommended raising the initial paid up voting equity share capital for unban cooperative banks (UCBs) transiting to SFBs from the present Rs 100 crore to Rs 150 crore, which it has said has to be increased to Rs 300 crore in five years.

"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 considered for conversion into banks provided they have completed 10 years of operations and meet the due diligence criteria and satisfy the additional conditions specified in this regard", the IWG said in its report released on Friday. It also made it easier for payments banks to convert to small finance banks (SFBs) by reducing the track record to three years from five years now.

The panel also suggested that a non-operative financial holding company (NOFHC) structure should continue as the preferred route for all new banking licences. While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status. Comments on the report may be submitted by January 15, 2021, through email.

"Where corporate house is a promoter, strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential".

The committee suggested doubling the minimum starting capital for universal bank license from Rs 500 crore to Rs 1,000 crore. "The idea is to ensure that there is enough capital for private sector banks in line with the vision of a $5 trillion economy". For Small Finance Bank, it was suggested to increase it from Rs 200 crore to Rs 300 crore. RBI will take a decision after reviewing them.

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