Dr. Prasanna Kumar Mohanty, Honorary Professor, Land, Housing, Transport and Urban Economics, University of Hyderabad chaired the working group to ‘Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ constituted by the Reserve Bank of India on June 12, 2020. Dr. Mohanty is actively involved in teaching and research in the field of Urban Planning, designing, financing and governance and currently teaching Land Economics, Transport Economics and Urban Economics and policy for Master Programme in Economics jointly with Dr. Alok Kumar Mishra, Associate Professor, School of Economics, University of Hyderabad since 2016. Dr. Mohanty is currently serving as the Director, Central Board of RBI, Board Member, National Housing Bank and Chairman, RBI Southern States Standing Committee. The Terms of Reference of the working group included a review of the eligibility criteria for individuals/ entities to apply for banking license, examination of the preferred corporate structure for banks and harmonisation of norms in this regard, and, review of norms for long-term shareholding in banks by the promoters and other shareholders. The report is released by the RBI on 20th Nov 2020 for comments by stakeholders and members of the public. The report is being discussed in the business standard, economic times and Financial Express to name a few and also discussed in the national news channels since it is available for public. The key recommendations include:
- The cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank;
- As regards non-promoter shareholding, a uniform cap of 15 per cent of the paid-up voting equity share capital of the bank may be prescribed for all types of shareholders.
- Large corporate/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 between the banks and other financial and non-financial group entities); and strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.
- Well run large Non-banking Finance Companies (NBFCs), with an asset size of ₹50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks subject to completion of 10 years of operations and meeting due diligence criteria and compliance with additional conditions specified in this regard.
- For Payments Banks intending to convert to a Small Finance Bank, track record of 3 years of experience as Payments Bank may be considered as sufficient.
- Small Finance, Banks and Payments Banks may be listed within ‘6 years from the date of reaching net worth equivalent to the prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations’, whichever is earlier.
- The minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crore to ₹1000 crore for universal banks, and from ₹200 crore to ₹300 crore for small finance banks.
- Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters / promoting entities/ converting entities have other group entities.
- While banks licensed before 2013 may move to an NOFHC structure at their discretion, once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 shall move to the NOFHC structure within 5 years from announcement of tax-neutrality.
- Till the NOFHC structure is made feasible and operational, the concerns with regard to banks undertaking different activities through subsidiaries/ Joint Ventures/ associates need to be addressed through suitable regulations.
- Banks currently under NOFHC structure may be allowed to exit from such a structure if they do not have other group entities in their fold.
- Reserve Bank may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. Whenever new licensing guidelines are issued, if new rules are more relaxed, 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.
Dr. Prasanna Kumar Mohanty was a Post-doctoral Fellow in Harvard University. He did MA (Economics) from Delhi School of Economics, MA (Political Economy) and PhD (Economics) from Boston University – with specialisation in Urban Public Policy and Finance. He was also a Fellow of Population Council, New York, Currently he is chair Professor of Economics, University of Hyderabad, and honorary adviser to Centre for Good Governance (CGG) and National Institute of Urban Management (NIUM), Hyderabad. An officer of Indian Administrative Service (1979 batch), Dr. Mohanty was the last Chief Secretary to Government of the combined State of Andhra Pradesh, a post held by him after becoming Secretary to Government of India. His other posts include: Mission Director, Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Government of India; Commissioner of Visakhapatnam and Hyderabad Municipal Corporation; Vice Chairman, Hyderabad Urban Development Authority, Director General, Centre for Good Governance (CGG), Hyderabad, and District Collector and Magistrate, Guntur, Andhra Pradesh.
He has been a member of several expert committees at national level, including Committee on National Training Policy, Expert Committee on Identification of BPL households, Expert Group on Decentralised Planning, etc. His initiatives for urban forestry in Visakhapatnam and Hyderabad Municipal Corporations bagged Prime Minister’s Award twice. Dr. Mohanty has authored “Planning and Economics of Cities: Shaping India’s Form and Future”- Sage publications (2019) and “Financing Cities in India: Municipal Reforms, Fiscal Accountability and Urban Infrastructure” – Sage Publications (2016) and “Cities and Public Policy: An Urban Agenda for India” – Sage Publications (2014). He has co-edited “Urbanisation in India: Challenges, Opportunities and the Way Forward” – Sage Publication (2014). He led the seminal study: “Municipal Finance in India – An Assessment”, undertaken and published by the Reserve Bank of India (2007). His current research interests include fiscal federalism, urban planning and development, infrastructure finance, good governance and public policy reforms.
Contributed by Dr. Alok Kumar Mishra, Associate Professor at School of Economics.