Context: The Reserve Bank of India (RBI) has constituted a five-member internal working group headed by RBI executive director P.K. Mohanty to review the existing guidelines on ownership and corporate structure of private sector banks.

More on the news

  • The need to examine the current guidelines on ownership comes after large shareholders of private sector banks sought RBI’s permission to raise their stakes beyond the permitted range.
  • Hindujas, promoters of IndusInd Bank, wanted to increase their stakes beyond 15% in the bank.
  • The Hindujas’ move followed the RBI’s decision to bring down the private stake to 26% by August in Kotak Mahindra Bank, and further reduce this stake over a period of time.

Rationale for constituting a new group

  • Currently, the large shareholders of private sector banks are permitted to hold up to 15% of the shareholding.
    • The bank licensing rules mandated that a private bank’s promoter will need to cut away holding to 40% within three years, 20% in 10 years, and 15% in 15 years
  • There is a need that ownership and control of private sector banks should be well-diversified and that the major shareholders are ‘fit and proper’
  • The specific contours have evolved over the years with specific prescriptions being given as part of licensing guidelines issued at various points in the past.
  • To comprehensively review the extant guidelines on ownership, governance, and corporate structure in private sector banks, taking into account key developments that have a bearing on the issue.

Tasks allocated to the group

  • The internal working group will examine the existing licensing guidelines and regulations on ownership and control of private sector banks. 
  • It will also suggest appropriate norms, keeping in mind the issue of excessive concentration of ownership and control. 
  • Also, it will examine and review the eligibility criteria for individuals or entities to apply for a banking license, and review the promoter shareholding norms at the initial licensing stage.
  • The group will also study the current regulations on holding of financial subsidiaries through a non-operative financial holding company (NOFHC) and suggest steps to migrate all banks to a uniform regulation.
  • According to RBI, the review will help harmonize norms applicable to banks set up at different time periods, irrespective of the date of commencement of business.

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