RBI proposal brings cheer to NBFCs

RBI proposal brings cheer to NBFCs

A Reserve Bank of India (RBI) panel on Friday recommended giving banking licences to large non banking finance companies (NBFCs) having a proven track record.
The panel has suggested that large non-bank lenders with asset sizes of more than Rs 50,000 crore, including those owned by corporates, should be considered for conversion into banks, provided they have completed 10 years of operation.

The proposal has brightened prospects of leading non-bank lenders owned by industrial houses, potentially allowing the Aditya Birla group, the Tata group and Reliance Industries to foray into banking sector.
Leading non-bank lenders such as Bajaj Finance, L&T Finance Holdings, Shriram Transport Finance, Tata Capital, Mahindra and Mahindra Financial Services, others are likely to apply for banking licences.
The recommendations are expected to trigger consolidation in the sector, where several lenders are struggling to meet minimum capital norms because of a surge in bad loans.

The changes will require amendments to the Banking Regulation Act.
The panel also suggested that payments banks can convert into small finance banks after three years of operations, potentially benefiting Paytm, Jio and Airtel payments banks.
The panel, headed by RBI executive director P K Mohanty, was set up in June to review ownership guidelines and corporate structure for Indian private sector banks. RBI has sought comments on the draft report by 15 January.
The panel also suggested raising the cap on promoter stake in private sector banks to 26% of the paid-up equity after 15 years of operation. Existing norms mandate private bank promoters to cut their ownership to 40% within three years and to 15% in 15 years.

The panel suggested bringing down the promoter holding to below 26% any time after the first five years of lock-in. For non-promoter shareholding, the current long-run shareholding guidelines may be replaced by a simple cap of 15% of the paid-up voting equity share capital of the bank.
The panel also suggested that a non-operative financial holding company (NOFHC) structure should continue as the preferred route for all new banking licences. Banks currently under NOFHC may be allowed to exit from such a structure if they do not have other group entities in their fold. Banks licensed before 2013 may move to a NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status.

The panel also suggested capping of banks’ investment in any new or existing entity to 20%. However, they may be permitted to make total investments in a financial or non-financial services company, which is not a subsidiary or joint venture or associate up to 20% of the bank’s paid-up share capital and reserves.
The Mohanty panel also recommended harmonizing of various licensing guidelines.
It suggested increasing the initial paid-up capital or net worth required to set up a new universal bank to Rs 1,000 crore; for SFBs to Rs 300 crore and for urban cooperative bank transiting to SFBs, it is Rs 300 crore in five years.

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