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RBI panel in favour of letting well-run large NBFCs convert into banks

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RBI Panel further said that the large companies or industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949, to prevent connected lending and exposures, and strengthening of the supervisory mechanism for large conglomerates.

India's Central Bank has suggested large non-banking financial companies (NBFCs) including corporates with asset size above 6.7 billion US dollars to convert into banks subject to certain conditions in a discussion paper released on Friday.

NBFCs, also called as shadow banks, are akin to normal banks, but they can not accept demand deposits and do not form part of the payment and settlement system and can not issue cheques drawn on itself.

The IWG in its recommendations had also said that non-promoter shareholding may be capped at 15 percent of paid-up voting equity share capital for all shareholders. Meanwhile, the report is placed on the RBI website for comments, which would further be examined by the central bank before coming to a conclusion. However, it should be mandatory only in cases where the individual promoters, promoting entities or converting entities have other group entities, the panel added.

"However, for payments banks intending to convert to a small finance bank, track record of three years of experience as payments bank may be sufficient", it said.

An internal working group set up by the RBI has proposed to raise the cap on promoters' stake in private banks from the current 15 per cent to 26 per cent in 15 years.

The move has a direct implication on promoter holding of Kotak Mahindra Bank and IndusInd Bank, where promoter holding has been a contentious issue. The working group's proposal if accepted can do away with the need to have a holding company when there is only one business (small finance bank) under it. A committee of the Reserve Bank (Bank) has suggested to change the banking law and offer banking license to the Industrial House. But once the NOFHC structure achieves a tax-neutral status, all those banks shall move to the NOFHC structure within five years from the tax-neutrality announcement.

It also said the initial paid-up voting equity share capital, net worth required to set up a new SFB, may be increased to Rs 300 crore. RBI has sought comments on the draft report by 15 January.

The IWG proposal also clearly states that the RBI must take steps to ensure harmonization and uniformity in different licensing guidelines, to the extent possible. "Whenever new licensing guidelines are issued, if new rules are more relaxed, the benefit should be given to existing banks, and if new rules are tougher, legacy banks should also conform to new tighter regulations, but a non-disruptive transition path may be provided to affected banks", the statement concluded.

In 2013-14, the RBI invited applications for new private banks. For Small Finance Bank, it was suggested to increase it from Rs 200 crore to Rs 300 crore.

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