Ceiling on private bank holding may be hiked to 34 per cent

Reserve Bank of India (RBI) is likely to publish its second draft policy framework for ownership and governance in private sector banks tomorrow.

Sources close to the development said that based on responses received and dialogues with various stakeholders, the central bank was likely to enhance the proposed holding cap in private banks to 34 per cent in the new draft. The earlier draft capped holding at 10 per cent.

The Indian Banks Association (IBA) which finalised the alternative model that would do away with the 10 per cent cap, submitted its proposal to RBI around a couple of months back and had proposed three major changes in consultation with private bank representatives who have agreed to the proposals.

IBA along with other stakeholders also recommended that no single corporate can acquire more than 26 per cent in a private bank which at present stands at 10 per cent.

It also said that in case of transfer of holding between five and ten per cent, one should not require any permission, if the entity had already received permission to acquire five per cent from RBI.

Bankers felt that acquisition up to five per cent by regulated bodies like mutual funds and pension and provident funds also should not require any permission from RBI.

FDI investment when made directly or individually which was proposed to be capped at 10 per cent should be enhanced to 34 per cent "" according to IBA.

Other recommendations providing adequate time to small private banks with less capital should to enhance their base to Rs 300 crore on a case to case basis.

RBI had proposed that the cap on holding was with the view to bring in good corporate governance among private banks.

According to experts, the 10 per cent level, however, had its negatives for in an event of set back and requirement of additional capital, the core management of a bank would not be in a position to fall back upon anyone to bring in additional capital.

This was because entities holding less than 10 per cent would be doing it more for the purpose of investment and small investors do not have ownership interest or the capability to pump in large funds. With one large holder there will be always the possibility of making someone responsible.

Sources also said smaller banks, specially older ones which are niche players and are very regional, need to be provided some respite on the capital requirement. For enhancing the capital at one-go will lead to the bank not being able to increase its business accordingly.