Businessmen, buyout firms may be allowed to run banks in India

MUMBAI | NEW DELHI: The Reserve Bank of India’s back-to-back moves on governance at Indian banks and a review of ownership guidelines and structures are likely to be stepping stones for letting industrial houses and foreign capital get a bigger slice of the baning sector amid stretched government finances and insufficient private capital.Simultaneous movement in both governance and a likely change in rules could address the long-pending grievances of capital-flush industrialists and buyout firms seeing an opportunity in the financial services sector, said experts.A measured move by the regulator could address the issue of both capital and potential conflicts of interest by business houses over possible diversion of funds to their own ventures.As the government plans to privatise some banks, a liberal ownership regime would increase the prospects of better bids for the assets that could be put up for sale, though it is yet to decide on the policy, said people with knowledge of the matter.“It’s a real big change,” said former RBI deputy governor R Gandhi, who was involved in designing previous guidelines on bank licensing. “The argument has been that capital is required, but who would bring it? The government can’t. Foreign capital is already permitted up to 74%. Foreign banks can have 100% subsidiaries. The fourth group left out is industrial houses.” 76377790The central bank last week took two key initiatives to address long-standing issues.It floated a discussion paper on bank governance limiting the tenure of a professional chief executive at 15 years at a stretch and capped the promoter director’s role at 10 years. The next day it constituted an internal group to review ownership and structure of private sector banks. The mandate of the group is to “examine and review the eligibility criteria for individuals/entities to apply for banking licence and make recommendations on all related issues,” and to “review the norms for promoter shareholding at the initial/licensing stage and subsequently, along with the timelines for dilution of the shareholding.”The current guidelines for on-tap licences for universal banks that came into force in 2016 prohibit industrial houses from owning banks, but permit them to hold up to 10%, deterring participation. Since the licensing of IDFC Bank and Bandhan Bank in 2014, there have been no applicants for banking licences. That could change if business houses are permitted a bigger role.“This time they are looking at it comprehensively,” said Kuntal Sur, partner, financial risk and regulation, at consultants PwC. “One can encourage an entrepreneur saying you can enjoy equity ownership and within the strict governance standards. Let your vision start and run the institution, then create a professional structure and then let it be run by executives.”While the exclusion of industrial houses from owning a bank was a historical overhang of bank nationalisation in 1969, many own nonbanking finance companies (NBFCs). The Bajaj, Mahindra and Murugappa groups are among those that own such lending institutions.Aliberal regime could help many of them become banks and gain in strength. “Clearly corporate houses wanted to tap but they did not,” said Sur of PwC. “Those who wanted to tap were prohibited from doing so.”Checks & BalancesHow would the regulator prevent fund diversions?“One of the suggestions from Niti Aayog is to have a complete regulatory ban on bank lending to group or associate business,” said a person familiar with policy discussions.But there are practical difficulties.“Internationally, we don’t have a model on how to ring-fence a bank from group companies of a conglomerate,” said Gandhi, the former RBI deputy governor. “One option is to say that you take part in economic interest, but not controlling interest.”The big groups, however, are loath to get into businesses they cannot control. Kotak Mahindara Bank promoter Uday Kotak, for instance, has had differences with the regulator over reducing his stake in the bank.Nevertheless, some industrial houses such as the Bharti and Reliance groups have already been dipping their toes in the water through payment banks. Others such as the Mahindra and Aditya Birla groups had applied and received provisional licences from the RBI but didn’t go ahead. It does indicate a latent interest in the sector if the incentives are right.The central bank permitting, the India Post Payments Bank could become a full-fledged bank. At a recent, high-level discussion at the Centre, it was suggested that a full-service ‘DakBank’ be established with an initial capital of Rs 15,000 crore. Indian banks may need more than Rs 1.3 lakh crore in capital as Covid-related defaults erode their capital buffer, of which state-run banks would need as much as Rs 82,500 crore, according to ICRA, the local unit of Moody’s Investor Services.

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