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New highs for private sector banks amidst RBI’s Ownership guidelines November 24 2020RBI

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The scenario of private sector banks saw considerable changes post the RBI’s ownership guidelines.

On Monday, banks, non-banking finance companies (NBFCs) and microfinance institutions (MFIs) traded near multi-year highs in financial stocks. In the early morning trade on BSE, banking and non-banking shares grew up to 20%. Shares of financial companies after the internal working group (IWG) of the Reserve Bank of India (RBI) reviewing the corporate structure of private sector banks proposed sweeping changes in bank ownership, enabling large corporate and industrial houses to own banks by amending the Banking Regulation Act, 1949.

Recommendations were provided by the panel on the promoter's shareholding in private banks, including minimum capital requirements for new banks. It has also suggested that well-run large NBFCs with total assets of Rs50,000 crore and above may be considered for bank conversion, while payment banks may after three years of being in operation, be permitted to convert into small finance banks (SFBs).

Below are some significant recommendations of RBI

·        The ceiling on the long-term stake of promoters (15 years) may be lifted from the current level of 15% to 26% of the bank's paid-up voting equity shares.

·        With respect to non-promoter shareholding, all forms of shareholders may be subject to a uniform limit of 15% of the bank's paid-up voting equity shares.

·        Well managed large non-banking financial companies (NBFCs) with an asset size of approximately Rs50,000 crore and above, including those owned by a corporate house, may be considered for conversion into banks subject to the completion of 10 years of operations and the fulfilment of due diligence requirements and compliance with the additional conditions set out in this respect.

·        The minimum initial capital required for licensing new banks should be enhanced from ? 500 crore to about ?1,000 crore for universal banks, and from ?200 crore to about ? 300 crore for SFBs.

·        Although banks licensed prior to 2013 may at their discretion, transfer to the NOFHC (Non-Operative Financial Holding Company) structure once the NOFHC structure has obtained a tax-neutral status, all banks licensed prior to 2013 shall move to the NOFHC structure within five years of the tax-neutrality announcement.

·        RBI can take measures to ensure harmonization and continuity in the various licensing guidelines to the extent practicable. 

Private sector banks have quickly gained market share from around 18 % (2015) to around 30% (2020) over the last five years, and we see this trend accelerating at a faster pace now.

JM Financial reported that it was strongly positive for IndusInd, IDFC Ltd, Equitas Holding, Ujjivan Financial, Equitas SFB, Ujjivan SFB, and marginally positive for RBL, DCB, Kotak, ICICI Bank and Neutral for HDFC Bank and Bandhan on the report of the RBI Internal Committee.

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