On November 26, 2021, Reserve Bank of India (RBI) released new norms for Private Banks.

Highlights

• Under the new norms, RBI has accepted the suggestion to increase cap on stake of promoters in banks from 15 percent to 26 percent.
• However, it is still examining if industrial houses should be allowed to run banks in accordance with the recommendations of an internal working group (IWG).
• In all, RBI accepted 21 out of 33 recommendations of the IWG.

Internal Working Group (IWG)

IWG is headed by the director of central board of the RBI, Prasanna Kumar Mohanty. This group was set up on June 12, 2021. It suggested in its report, published on November 20, that large corporate or industrial houses should be allowed in banking following the amendments to the Banking Regulation Act. This recommendation created an uproar among former governors and deputy governors of RBI. RBI did not accept this suggestion.

RBI’s call on recommendations

• Central bank said that, non-promoter shareholding cap for an individual or non-financial institution should be 10 per cent as opposed to what suggested by IWG to keep it 15 per cent for all kinds of non-promoter shareholders.
• However, RBI allowed the financial institutions, public sector undertakings (PSUs), supranational institutions, or government to hold 15 per cent in private banks.
• As per RBI’s earlier rules, non-promoter shareholding could increase to 40 per cent for well-diversified, regulated, and listed financial institutions, PSUs, supranational institutions, or government.
• RBI accepted the suggestions on a “reporting mechanism” to pledge shares by promoters.
• It rejected the recommendation to allow payments banks to convert themselves into small finance banks having three years’ experience.
• It accepted IWG’s recommendation that banks should have higher initial capital of at least Rs 1,000 crore.