Banking reforms

Context- RBI committee has recommended a series of changes that could transform the banking landscape by paving the way for large industrial conglomerates to set up banks.

What are Non-Banking Financial Companies NBFCs?

These are establishments that provide financial services and banking facilities without meeting the legal definition of a Bank. Hence they are frequently referred to as “shadow banks”.

Significance of NBFCs-

  • These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for growth of new ventures.
  • They alone count for 12.5% raise in Gross Domestic Product of our country.
  • However, they are restricted from taking any form of deposits from the general public.

What are recommendations of RBI’s working group regarding NFBCs?

Proposal by RBI’s internal working group-

  1. The group also suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949.
  2. It recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.
  3. NBFC or shadow bank with assets of Rs 500 billion and above, including those which are owned by a corporate house may be considered for conversion into a bank after 10 years of operations.
  4. Conversion to Small finance bank SFB-
  • Payments banks with three years of experience can be eligible for conversion into a small finance bank.
  • SFB and payments banks may be listed within 6 years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations, whichever is earlier.
  1. The minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crore to ₹1000 crore for universal banks, and be raised to ₹300 crore from ₹200 crore for SFBs.
  2. For non-promoter shareholdings a uniform cap of 15% of the paid-up voting equity share capital of the bank instead of a current tiered structure.
  3. Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters/promoting entities/ converting entities have other group entities.

Way forward-

  • It is a welcome idea to boost economic activity, job creation enhancing liquidity.
  • Strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential, where corporate house is a promoter.
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