Change rules to create large Indian banks, Swadeshi think-tank tells RBI

It is important for an alignment of a bank with its country’s objectives- such alignment starts from a deep-rooted passion for nation building and which has a long -term vision. Such passion and dedication are typical of entrepreneurs who are domestic,” the paper said.

India regulates the banking sector through a cap on voting rights (defined in the Banking Regulation Act), and also through ownership caps (through RBI’s administrative circulars).

RBI’s universal banking guidelines state that promoters’ holding in banks should progressively come down to 15 percent within 15 years of starting operations. The rationale for such an approach is that a widely held/diverse ownership would lead to better governance through lack of concentration of power in the bank.

Promoters’ voting rights are capped, implying that promoter group cannot `control’ the board or push through decisions even if it enjoys greater shareholding.

The CEPR paper, however, called for a change in the RBI’s diversified ownership norms, arguing that on most occasions private bank promoters end up diluting their shareholding in favour of foreign investors who now are majority owners of many Indian private banks.

It has asked the RBI to put its circular on dilution of owner’s equity stake in private banks in abeyance and immediately set up a committee to relook and re-examine the economic ownership issue.

“RBI should not be aggravating the economic ownership situation further by pushing for significant dilution by promoters to as low as 15 percent. A higher limit of 26 per cent in consonance with the voting cap is recommended,” it said.

The foreign ownership in HDFC bank is 72 percent, ICICI Bank is 60 percent, Aixs Bank is 52 percent, IndusInd Bank is 73 percent and Kotak Bank is 47 percent, the CEPR paper said.

“In the current global scenario, it is dangerous to rest the ownership of private sector banks in the hands of foreign entities,” it said.

“India’s banking system is predominantly owned by the government, followed by the foreigners and the least by Indians. The share of public sector banking will come down, and under the current policy, that space will be occupied irrevocably by foreigners-owned banks unless there is a policy change,” the CEPR paper said.

Instead of bringing in multiple regulations, the RBI may look act activity-based regulations rather than entity-based framing of rules, it said.