Banking Sector Overhaul (21 November 2020)
Banking Sector Overhaul (21 November 2020)
Why in News:
RBI recommends banking industry overhaul.
A working group at the RBI has recommended a series of changes that could transform the country’s banking landscape by paving the way for large industrial conglomerates to set up banks. The proposals could also allow large non-banking finance companies and niche payment banks to convert into lenders.
The Internal Working Group (IWG) of the Reserve Bank of India (RBI), headed by PK Mohanty, was constituted by the RBI in June 2020, to review the extant ownership guidelines and corporate structure for private sector banks in India.
Summary of the Debate
Recommendations made by RBI:
- Bank Promoters: Banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past.
- Banking Licences: Giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949.
- Size of the Stake: Increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.
- NBFC: NBFC or shadow bank with assets of Rs 500 billion and above, including those which are owned by a corporate house may be considered for conversion into a bank after 10 years of operations.
- Conversion to Small finance bank: Payments banks with 3 years of experience can be eligible for conversion into a small finance bank.
- Initial Capital Requirement: The minimum initial capital requirement for licensing new banks should be enhanced from Rs 500 crore to Rs 1000 crore for universal banks, and be raised to Rs 300 crore from Rs 200 crore for SFBs.
- Non-promoters: For non-promoter shareholdings a uniform cap of 15% of the paid-up voting equity share capital of the bank instead of a current tiered structure.
- Non-operative Financial Holding Company: They 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.
Regulation of NBFCs:
- There is a case for the light-handed regulation of NBFCs continuing, but regulation on regular banks becoming much tougher, because at the end of the day, the average depositor expects all his deposits to be fully secured.
- NBFC sector has served the Indian economy very well, because it has taken credit to categories of consumers who wouldn’t have got it, they have had focus in sectors which banks would have found it difficult to serve in that manner. They have also been flexible enough and the light-handed regulation of NBFCs was good.
- The RBI is now doing is a little modest calls correction that if it is too big to fail or a systemic problems, the RBI will regulate them little more or supervise some more to become banks.
- Within NBFCs, they have improved the supervisory and regulatory mechanisms, but so far they have not overdone it.
- They moved very quickly to rescue of NBFCs in the early days of the serious crisis caused by the covid lockdown.
Impact of covid-19 pandemic on Banking Sector:
- Around 19 sectors, which were not under stress before the pandemic but have been hit it, account for Rs 15.5 lakh crore of debt.
- The low investment demands are likely to cause a considerable decline in loan growth in coming years.
- Migrant people who were got into the banking habit who were getting money, they have now been disconnected.
- Most of the poor people have resorted to private money lending.
- Corporates has been hard hit given the slowdown, resulting in rising defaults.
- There is a need of a banking system where all deposits are fully secured to give enough confidence to the retail saver and to the entire economy. Every depositor in a bank should feel that all his deposits are secure, he has to pay an insurance premium for it.
- RBI has to be convinced about the need to allow NBFCs, banks and large companies to get into the banking space.
- Banks are clearly lagging; they are not investing sufficiently in technology to be ahead of trends that are there, both in terms of payments, in terms of savings, etc.
- There should be some willingness on to inject additional capital if required in some banks.
- The government and RBI should be more liberal if banks have to get over this covid crisis, especially expansion of banking reaching the right people and the farmers.
- Government should also look in to how to get the new design of banks so that they answer the uniquely Indian situation.
- The reforms which government is considering have to consider the marginalized sectors who have been affected during covid.
Important points made by the Guests
Sidhartha, National Economic Editor, TOI
Ajay Shankar, Former Secretary, DIPP, Ministry of Commerce & Industry, GOI
Dr. P. Pullarao, Economist