Reserve Bank of India's Policy on Bank Ownership
The Reserve Bank of India (RBI) has shifted its policy on bank ownership from prioritizing "skin in the game" to promoting diversified ownership. This change is evident in recent approvals for foreign institutions to acquire significant stakes in Indian banks.
Early Evolution
- The policy began with Kotak Mahindra Bank Limited (KMBL) in 2001, where promoters initially held 61% equity, which was later required to be reduced to 49%.
Policy Shift in 2013
- RBI revised its guidelines, requiring banks to be set up through a wholly-owned non-operative financial holding company (NOFHC).
- Promoter's initial 40% stake was locked for five years, to be reduced to 15% within 12 years.
Further Regulations and Compliance
- By 2016, RBI reinforced diverse ownership, mandating a 15% shareholding limit for existing banks.
- Kotak Bank had to reduce its promoter stake to comply, despite opposition from promoters.
Controversies and Settlements
- Kotak Bank attempted to reduce promoter stake via non-convertible preference shares, leading to a court dispute over voting rights.
- A settlement allowed Uday Kotak to hold up to 26% share capital but capped voting rights at 15%, later revised to 26%.
Special Situations and Recent Developments
- RBI allows concentrated ownership in weak banks, as seen with Fairfax Financials in CSB Bank and DBS Bank in Lakshmi Vilas Bank.
- Recent approvals for SMBC and NDB to acquire stakes in Yes Bank and RBL Bank highlight RBI's preference for regulated institutions.
Current Challenges and Recommendations
- India's banking system lacks sufficient domestic banks and entrepreneurs with long-term capital.
- RBI is encouraged to reconsider frameworks to allow large NBFCs to convert into banks.
- Emphasis on domestic capital is crucial for meeting India's credit needs and economic growth.
The author suggests a reevaluation of the RBI's frameworks, advocating for the development of domestic banking capabilities over reliance on foreign capital. The views expressed are personal and do not necessarily represent those of Business Standard or the author's affiliations.
