| "It is only a threshold beyond which one requires prior approval from the regulator," said Usha Thorat, RBI executive director. She also made it clear that the central bank did not want to disrupt the banking system by forcing promoters to dilute their holdings. |
| Thorat was speaking at a one-day seminar organised by the Confederation of Indian Industry (CII) on "Ownership and Governance in Private Banking". |
| This kicked off the first round of debate on the contentious issue of ownership of private banks. The RBI floated draft guidelines on this on July 2. |
| The RBI would issue separate guidelines on foreign banks' stakes in Indian banks subsequently in line with the government's commitment to the World Trade Organisation (WTO), said RBI Deputy Governor Rakesh Mohan. |
| The RBI's decision to impose stringent norms relating to promoters' holding is a fallout of the "unique and special" Indian banking system in which people put their entire life savings, Mohan said. "As a regulator we need to keep public confidence that the banking system is in good health," he added. |
| Thorat's comment on the sidelines that "RBI is known to honour its commitment" essentially means that two new private banks, Kotak Mahindra Bank and Yes Bank, would be given the promised time frame to dilute their respective promoters' holdings. |
| When the RBI issued a banking licence to Kotak Mahindra Bank in 2003, it had stated that the promoter could hold up to a 49 per cent stake for five years. |
| "It is on the basis of a five-year lock-in period that we got the licence. While we would be happy to look at dilution going forward, consistency of a policy framework is what we are looking for," said Uday Kotak, vice chairman & managing director, Kotak Mahindra Bank. |
| Mohan hinted that a concentrated shareholding could pose moral hazards for the banking system owing to the linkages of owners with other areas. He also said that worldwide the move is towards greater diversification of shareholding in banks. |
| The deputy governor pointed out that with the increasing market share of private banks in the banking industry and the growth in the economy, there is a greater need for wider ownership to ensure that banks are resilient enough to absorb any kind of shock. |
| Citing the Global Trust Bank (GTB) example, which "had the best of shareholders like ADB and IFC, Washington, when the licence was given", Mohan said "the licence was issued to fit and proper shareholders but we need to continuously monitor the fit and proper ownership." |
| The RBI will come out with a second draft guideline based on consultations with the banking industry, after which the final guideline would be ready. |
| "The second draft guidelines will give more clarity following discussions that have generated doubt," said Thorat. |
| The central bank stated that while it is not against investments by private funds and foreign banks, they need to seek regulatory approval if they wish to buy equity beyond the threshold limit and follow various regulations. |
| Any investment in excess of 10 per cent, according to RBI, is a strategic investment. "The regulator needs to be convinced that the higher stake holding is the interest of the stakeholders. We will intensify due diligence on higher holdings," Thorat said. |
| This is in line with regulations in most countries where prior approval is necessary at different threshold limits, she added. |
| Commenting on the proposal to raise the minimum net worth to Rs 300 crore, Thorat said this will encourage mergers and acquistions and help organically bring down the shareholding. |
| The RBI will, on a case-to-case basis examine whether distressed banks need higher promoter holdings. At the same time, the RBI sees high institutional holding as a positive development so long as it promotes good management, said Mohan. |
| This implies domestic institutions like Life Insurance Corporation will not be asked to reduce their stakes in UTI Bank and Corporation Bank. |
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