It may be a 'no-go' for banking licences to
large industrial houses.
Illustration: Uttam Ghosh
The
Reserve Bank of India may not be in favour of issuing banking licences to large
industrial houses as suggested by an internal working group in November last
year, and the regulator is expected to make its stance clear when it releases
its final report soon.
"The status quo may be expected
to continue," said a top source.
The central bank may also
not substantially move from its stated position that 'a non-banking financial
company (NBFC) which is part of a group that has total assets of Rs 5,000 crore
or more, and that the non-financial business of the group accounts for 40 per
cent or more in terms of total assets and in terms of gross income, is not
eligible', it is learnt.
Simply put, an NBFC that is
part of an industrial house must have a greater footprint in the financial
services business.
The RBI, however, may be
willing to grandfather regulations for entities that pass its muster on reserve
requirements -- cash reserve ratio and statutory liquidity ratio -- and on
priority sector targets.
This, it was pointed out,
could be a major departure, as no such leeway was granted in the case of the
ICICI Ltd-ICICI Bank reverse merger, or when IDFC Ltd converted into IDFC First
Bank.
An exception was made in
the case of the IDBI Ltd-IDBI Bank reverse merger, though.
Large
industrial houses' hopes of being awarded banking licences had soared after the
IWG was set up to review the extant ownership guidelines and corporate
structure for private banks.
The report, which was
submitted on November 20, 2020, had weighed the pros and cons of issuing
banking licences to industrial houses.
The RBI's final report is
expected to have more details of an operational nature, but from a policy
stance, it may be a 'no-go' as far as issuing banking licences to large
industrial houses is concerned.
Another source pointed out
that "the IWG had touched upon several other aspects of the extant
regulatory framework for private banks, and issuing licences was only part that
got highlighted".
One of the triggers for
setting up the IWG was 'heightened expectations for the banking sector to scale
up for a greater play in the global financial system' amid the $5 trillion
target for the Indian economy.
It was in this context
that, in order to leverage these developments for engendering competition
through the entry of new players, that the RBI initiated the process for a
comprehensive review of the extant guidelines on licensing and ownership for
private banks.
The
IWG's report had led to past central bank governors and deputy governors
voicing their concerns on the issuance of banking licences to the big boys of
India Inc.
On his part, Governor
Shaktikanta Das was categorical that the IWG's report should not be seen as
being the central bank's point of view.
'The IWG has two external
members, who are also members of the RBI central board, and the IWG has acted independently.
They have had their independent deliberations. They have given a certain point
of view,' Das stated on December 3, 2020.
Large corporate houses in
the country have been seeking to foray into the banking sector ever since a
liberalised licensing policy came into being in 1993.
The IWG had interacted with
serving and retired deputy governors of the RBI, bankers, legal experts, and
other professionals for their insights on the subject.
And except one, nobody was
in favour of corporate and industrial houses being allowed to promote a bank.
The view was that the
prevailing corporate governance culture in corporate houses is not up to
international standards, and it will be difficult to ring-fence the
non-financial activities of promoters with those of the bank.
Any stress in the
non-financial business may spill over into the bank.
Fears of inter-connected
lending were also expressed.
Besides, assessing the
'fit-and-proper' status of promoters and the large number of group entities
will be very difficult, many felt.
It was also widely held
that as far as fulfilling the need of capital is concerned, "it is not
difficult to attract capital from sources other than corporate houses, for
well-governed banks".
And that there is also a
need to significantly scale up regulatory and supervision capacity before
permitting corporate and industrial houses to promote banks.
What is also playing in the
background is large industrial conglomerates' compliance with the RBI's
guidelines on core investment companies (CICs).
This was anyway to receive
closer scrutiny ahead of the grant of banking licences.
The banking regulator's
August 13, 2020, circular had said the number of layers of CICs within a group
(including the parent CIC) is to be restricted to two -- irrespective of direct
or indirect holding -- and the rule has to be adhered to by the end of March
2023.
It was pointed out that the
equity holding structure in banks is straightforward.
In the case of NBFCs, it's
not so.
"You can't have a
situation wherein banks start mirroring NBFCs on this front," said a
source, adding, "The need to disentangle the ownership labyrinth to
understand both leverage and cross-ownership is important."
It was also mentioned that
the grant of banking licences will hinge on what the RBI's onsite inspection of
CICs throws up.
In effect, the
non-operative financial holding company that is to sit atop the bank will have
to be ring-fenced from unrelated encumbrances before a licence is granted.
CICs within conglomerates
set up over decades have linkages with their own entities and joint ventures
(domestic and overseas), and it may be some time before these are unwound.
The said August
circular also did away with the definition of systemically important CICs
(non-deposit taking) and with 'exempted CICs', which, the RBI observed,
provided unintended credibility to such firms.