A Reserve Bank of India (RBI) panel on Wednesday recommended that industrial and business houses may be permitted to promote banks.

“Industrial and business houses that have predominant presence and experience in the financial sector could be allowed to set up banks subject to other due diligence process,” the panel observed in a discussion paper on entry of new banks in the private sector.

The 2001 licensing guidelines prohibited promotion of new banks by industrial houses. However, individual companies, directly or indirectly connected with large industrial houses, were permitted to acquire by way of strategic investment shares not exceeding 10 per cent of the paid-up capital of the bank, subject to RBI’s prior approval.

The guidelines for new private bank licences first came in January 1993 and later revised in January 2001.

Further it stated that “As an intermediate step, industrial and business houses could be allowed to take over RRBs, before considering allowing them to set up banks.”

The panel also recommended for giving permission to convert non-banking financial companies (NBFCs) be allowed conversion into banks. “In the case of conversion of NBFCs promoted by large industrial and business houses, the pros and cons of permitting industrial/business houses to promote banks as well as the requirement that the industrial/business house should not be engaged in real estate activity directly or indirectly will also apply.”

Further, it recommended to permitting standalone (that is, those not promoted by industrial/business houses) NBFCs (including those regulated by the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India and the National Housing Bank) to promote banks.

The Union Finance Minister, in his budget speech for 2010-11, had announced that the RBI was considering giving some additional banking licences to private sector players.

He had also stated that NBFCs could also be considered, if they meet the RBI’s eligibility criteria.

The panel stated that there is a case to have the minimum capital requirement at more than Rs.300 crore for licensing of new banks in the private sector from the current requirement of Rs.200 crore, which would be increased to Rs.300 crore over three years from the commencement of business.

The panel gives two options: Having a low minimum capital requirement (but more than Rs.300 crore) for new banks; and having a high (say Rs.1,000 crore) minimum capital requirement for new banks.

However, it stated “Initial minimum capital may be prescribed at, say, Rs.500 crore with a condition to raise the amount to, say, Rs.1,000 crore within a period of, say, 5 years.”

Promoter shareholding

On minimum and maximum caps on promoter shareholding and other shareholders the panel recommended that “retaining the current approach of requiring promoters to bring in a minimum of 40 percent of capital with lock-in clause for five years and the threshold for other significant shareholders to be restricted to maximum of 10 per cent with the requirement to seek acknowledgement from the RBI on reaching 5 per cent threshold and above. Promoters too would have to dilute to the extent required in a time bound manner, say, five years after the lock in period.”

The panel also gives the option of retaining the general threshold for the shareholders at 5 per cent of the capital but raise the threshold for promoters and other significant shareholders to, say, 20 per cent in the long run. Higher shareholding could be considered exceptionally subject to increasingly stringent criteria.

On foreign shareholding in the new banks, the panel stated “since the objective is to create strong domestic banking entities and a diversified banking sector which includes public sector banks, domestically-owned private banks and foreign-owned banks, aggregate non-resident investment including FDI, NRI and FII in these banks could be capped at a suitable level below 50 per cent and locked at that level for the initial ten years.

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