Government remains wary of granting bank licences to big corporates

NBFCs, such as Tata Capital, Bajaj Finance, and Vizag-based firms, have robust governance and risk management frameworks

The government remains reluctant to allow business houses to hold controlling stakes in banks. A senior government official said the existing cap of 26 percent on corporate shareholding is intended to prevent “self-lending” risks – a key concern rooted in the historical issues that led to bank nationalisation.

The official acknowledged the strong risk frameworks and governance standards followed by some large NBFCs, but emphasised that permitting corporate-owned banks could reopen avenues for related-party transactions and systemic instability. While NBFCs are playing an increasingly important role in credit delivery and several meet near-bank compliance norms, the government remains cautious about relaxing the current regulatory stance.

The Reserve Bank of India (RBI) Governor Sanjay Malhotra on May 23 said that the central bank is reviewing the norms governing promoter shareholding and bank ownership.

“Corporates want to have a bank licence. But they also want more shareholding. Both cannot work,” the official said on condition of anonymity, adding that the current regulatory cap on effective corporate shareholding – set at 26 percent – is in place precisely to avoid related-party lending and concentration risks.

The official said that some large NBFCs, such as Tata Capital and Bajaj Finance have robust governance and risk management frameworks, but they must operate within the existing regulatory thresholds.

“If they want a bank licence, they have to do it at the 26 percent maximum limit for promoters. They will have to diversify the holding as per current law and regulation,” the official said.

Regulatory framework

Currently, RBI rules require a bank promoter – defined as a shareholder with significant influence and management control – to reduce their holding to 26 percent of the paid-up share capital or voting rights within 15 years from the commencement of banking operations. Voting rights are capped at 26 percent from day one, even if a higher economic interest is held.

While these norms apply uniformly to domestic and foreign promoters, they have often been viewed as a deterrent by large corporates seeking to expand into the banking sector.

The official cited past experiences to justify the government’s caution.

“Otherwise, these guys will lend to themselves only… That is one reason why the nationalisation happened a long time ago,” the official said, referring to the 1969 bank nationalisation triggered by concerns over concentration of funds in a few hands.

RBI reviewing norms

RBI’s reivew of ownership norms comes amid growing interest from both foreign investors (like Sumitomo Mitsui’s stake in Yes Bank) and domestic NBFCs that are expanding their credit footprint and aligning with compliance norms.

However, the government remains cautious.

“If corporates set up banks, they may self-deal. That’s American lingo — basically lending to oneself,” the official said, adding that the broader financial architecture must structurally mitigate such risks.

Even though regulations bar lending to promoters or related parties, the government sees a risk of circumvention where ownership is concentrated.

“You have guidance on related-party transactions,” the official said, “but there must be clear separation.”

Big NBFCs

While Bajaj Finance and Tata Capital have not formally applied for bank licences recently, both are often viewed as strong candidates for potential conversion into banks due to their scale, retail footprint, and governance credentials. Bajaj Finserv had earlier applied under the 2013 guidelines but later withdrew, stating that a bank licence was not essential to deliver its financial services offerings.

Tata Capital, meanwhile, recently restructured into an Investment Credit Company and has filed for an IPO — steps that industry experts believe signal long-term readiness for a possible transition to a banking model.

Yet, the regulatory stance remains firm. “Nobody can hold 51 percent in a bank — not even common people. The cap is 26 percent, and that’s what applies to corporates too,” the official added.

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