Can't have one-size-fits-all approach to promoter stake: RBI board member

Since 2016, India has witnessed growth of differentiated and specialised banks such as local area banks, small finance banks and payments banks, says Sachin Chaturvedi

The Internal Working Group (IWG) of the RBI has recommended a graded approach to reducing promoter stake in banks as a one-size-fits-all approach does not help, says Sachin Chaturvedi, a member of the committee. In an interview with Subhomoy Bhattacharjee, Chaturvedi, who is also a member of the central board of governors of the RBI, talks about the reasoning behind the guidelines. Edited excerpts:

Why did the committee recommend changes in ownership structure in private sector banks? What were you trying to address? 

The report has come at a time when on the one hand confidence in the regulatory architecture has been shaken by a series of defaults across various private sector banks. On the other, growing aspirations for the $5-trillion economy require more market instruments for greater access and further expansion.

Since 2016, India has witnessed growth of differentiated and specialised banks such as local area banks, small finance banks and payments banks. In fact, prior to nationalisation, India had a pre-dominant presence of private sector banks. This was opened again in four different phases — in 1993, 2001, 2013 and then in 2016 — and each time regulatory preferences were different.

As a result, similar entities were being governed under different frameworks, giving scope for regulatory arbitrage. This report is significant as it attempts to suggest how the business of banks should be organised. It suggests that whenever a new licensing guideline is issued, if new rules are more relaxed, benefit should be given to existing banks immediately.

If new rules are tougher, legacy banks should also confirm to new tighter regulations, but the transition path may be finalised in consultation with affected banks to ensure compliance with new norms in a non-disruptive manner.

What is the justification for the differential treatment for reduction in promoters’ equity? 

A one-size-fits-all approach will not help. That’s why we have recommended a graded approach. The cap on promoters’ stake in the long run — 15 years — may be raised from the current levels of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank, or the promoter can choose to bring down the holding to even below 26 per cent any time after the lock-in period of five years is over.

So permutations and combinations have been suggested to encourage more NBFCs to come into the banking sector. It will also reduce the control of individuals on banks, which should be a healthy development. It’s necessary to have multiple stakeholders in banks. Diversification of holding will create larger accountability, which is what we want. 

On the issue of allowing large firms or industrial houses to come into the banking system, do you expect the recommendations will be controversial? 

We have said such entities can come in as promoters of banks only after necessary amendments to the Banking Regulations Act, 1949. We have inserted safeguards to deal with issues of connected lending and exposures between the banks and other financial and non-financial group entities as well as strengthening of the supervisory mechanism for large conglomerates, including consolidated supervision.