RBI panel for companies as bank owners: Why firms mustn’t count chickens before they hatch

An RBI panel has suggested allowing large companies to become the promoters of banks; however, companies may find the compliance very demanding even if the Reserve Bank of India approves the recommendations. In view of the serious risks, governance concerns, and conflict of interest that could arise, the RBI has maintained a cautious stance on this matter, said a report by Institutional Research Desk at HDFC Securities. Despite briefly allowing industrial and business houses to apply for a banking license under the 2013 edition of its licensing guidelines, the RBI granted a banking license only to two entities ‐ IDFC Bank and BANDHAN Bank, both erstwhile financial institutions, it added.

Unsuccessful past

On the other hand, many other companies either unsuccessfully applied or withdrew their applications citing excessive regulatory requirements, the report further said. Though the RBI’s Internal Working Group aims at utilizing the capital, managerial expertise, and strategic thinking of large companies, it also underlined that companies should be permitted to promote banks only after necessary amendments to the Banking Regulation Act are made.

Selective and cautious RBI

“Despite the RBIʹs fresh attempt at welcoming industrial houses to apply for a banking license, we remain relatively skeptical of this route playing out meaningfully in the near term. While several large domestic conglomerates stand to gain from having a banking license, we believe that the RBI will continue to remain selective and cautious in its approach to allowing industrial houses,” the HDFC Securities report added.

It is to be noted that the RBI had allowed companies as promoters in Universal Banking License issued in 2013 but backtracked while issuing 2014 Small Finance Banks license norms, claiming concerns around governance.

Financial expert Ashvin Parekh too noted that experience on allowing bank licenses to corporate houses outside India has not been good, and thus new dynamic leadership at the RBI will have to think through the pros & cons before allowing corporates coupled with ring-fencing mechanisms.

Food of aspirants likely, gatekeeping required

Meanwhile, the proposal for allowing large corporate or industrial houses as bank promoters, and allowing the conversion of NBFCs into banks owned by industrial houses look difficult for the RBI. Allowing industrial or corporate houses to promote banks could open floodgates for many aspiring companies, and would need to be dealt with caution by the RBI given governance concerns, said a report by Emkay. Even if the RBI takes a liberal stance to allow industrial houses, it would try to ring-fence banks and also extensively use its discretionary power including ‘fit & proper’ criteria to keep undeserving groups at bay, the Emkay report added.