Towards more robust private banks

Towards more robust private banks

The RBI working group on ownership and corporate structure of banks has done well to recommend sweeping changes that would allow companies to promote or own sizeable chunks in banks and to allow promoters to hold 26% equity, subject to the extant fit-and-proper criteria being met. This opens the way for some public sector banks to increase their capital buffers by issuing additional equity that could be picked up by private sector giants. This would give more fiscal room to the government while strengthening the financial sector.

Changes in technology and the nature of mediation of savings from individual savers to those who use resources to create additional income or to allocate capital among different seekers of capital warrant changes in ownership norms. Electronic fund flows and bank accounts with uniquely identified owners make it possible for the banking supervisor and the regulator to not only track the movement of funds but also to carry out sophisticated analytics. Identifying a barred related-party transaction by a bank owned by an industrial house is a lot easier today than it was even 15 years ago. The emergence of large non-banking finance companies that fund infrastructure projects and a growing corporate debt market create new dynamics in mediation of savings. The emerging fintech industry is likely to bring further, possibly disruptive, changes. It is welcome that India’s regulatory framework is keeping pace.

RBI’s readiness to hand over Lakshmi Vilas Bank to Singapore-based DBS indicates that the central bank would be happy to accept and act on the recommendations of the working group. The working group has liberalised the conditions for a non-banking finance company to convert to a bank, apart from raising the minimum equity threshold. Payment banks, too, can convert to banks, which is a welcome development. All told, these recommendations pave the way for a healthier, stronger and more diverse banking sector. RBI’s focus should shift to developing the corporate debt market and the fintech sector.