Moneycontrol
Last Updated : Dec 04, 2018 05:43 PM IST | Source: PTI

Ownership norms for pvt lenders impeding expansion of large financial institutions

The Centre for Economic Policy Research in a recent paper said the bevy of ownership prescriptions is at times "contradictory and ambiguous" and there are different yardsticks for banks licensed under different conditions.

The Reserve Bank of India (RBI) needs to relook the ownership guidelines for private sector banks as 'multiple and ambiguous rules' are restricting expansion of home-grown large financial institutions, says a report.

The Centre for Economic Policy Research (CEPR) in a recent paper said the bevy of ownership prescriptions is at times "contradictory and ambiguous" and there are different yardsticks for banks licensed under different conditions.

Regarding 'on tap licensing guidelines' the report noted, "the said guidelines had elaborate and complex prescription on ownership by way of multi layering, all to ensure control on ownership".

Further, the report blamed the complex rules for the lack of interest among Indian institutions to set up new banks.

"It is pertinent to note that even after 24 months of announcing such on tap guidelines, not a single institution has come forward to set up a bank," it said.

Under the current RBI rules, private sector bank promoters are required to dilute their shareholding to 15 per cent within 15 years of starting operations.

The objective of such a rule is that diverse ownership would prevent concentration of power to lead better governance, it said.

However, such shareholding dilution primarily ends up with foreign investors, who are the majority owners in most of the Indian private sector banks.

"India's four of the top five banks are majorly foreign owned now," it said.

The foreign ownership in HDFC Bank is around 72 per cent, ICICI Bank (60 per cent), Axis Bank (52 per cent), IndusInd Bank (73 per cent) and Kotak Mahindra Bank (47 per cent), the report noted.

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

The report further said RBI should put its circular on dilution of owner equity stake in private banks in abeyance and immediately set up a committee to relook and re-examine the economic ownership issue.

Recently, RBI ordered freezing of Bandhan Bank's CEO Chandra Sekhar Ghosh's salary and prohibited it from opening new branches. The bank failed to bring down the promoter's shareholding to 40 per cent within three years of operation.

The central bank has also rejected Kotak Mahindra Bank's proposal to issue perpetual non-cumulative preference shares (PNPCS) to cut promoter holding.

RBI has asked the bank to reduce promoter shareholding to 20 per cent of paid up capital by December 31, 2018 and 15 per cent by March 31, 2020.

Uday Kotak, Vice Chairman and Managing Director of Kotak Bank holds 30.03 per cent stake in the bank. The PNPCS issue was part of Kotak's plan to pare his holding and meet the December 2018 guidelines.
First Published on Dec 4, 2018 05:14 pm
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