Economy

RBI amends ownership guidelines in private banks

13 May 2016 | By Achin Garg

The Reserve Bank of India (RBI) has changed the guidelines for ownership in the private sector banks.

The ownership will now come under 2 broad categories- (i) natural persons or individuals and (ii) legal persons, which include entities or institutions.

The changes are aimed at enabling private sector banks meet the additional capital requirements under Basel III regulations and rationalising ownership limits.

In context: Private sector banks ownership

Background of private sector banks

Private sector banks were allowed by RBI in 1993 and subsequently licences were given to 9 private banks such as HDFC, ICICI, IndusInd, etc. Yes Bank was the last one to receive a licence in 2004.

22 Feb 2013RBI issues guidelines for private sector banks

The RBI had released guidelines for private sector banks in Feb 2013, which allowed entities or groups with 10 years of sound track record in the financial sector to open banks.

The minimum capital required was fixed at Rs.500 crores and the foreign ownership was fixed at a maximum of 49% for first five years.

The new guidelines are an amendment to these guidelines.

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13 May 2016RBI amends ownership guidelines in private banks

Basel IIIWhat is Basel III?

Basel III norms, which need to be implemented from 1st April 2019, are a sort of global regulatory standard for the banking sector.

They aim to improve risk management and governance of banks, improve their shock absorbing ability, and strengthen transparency and disclosure.

Basel III requires Indian banks to maintain a minimum capital adequacy ratio (CAR) of 11.5% against 9.62% currently maintained by banks.

Shareholding The new shareholding caps

The RBI had issued separate limits for financial and non-financial institutions.

While total foreign investments in banks remain capped at 74%, the stakes which individuals and institutions can acquire has been doubled to 10%.

Well-regulated financial institutions can take up to 40%.

Non-financial institutions can take up to 10% stakes whereas non-regulated or non-diversified and non-listed entities can take up to 15% stakes.

Implications of the RBI's tweaking

"Through this RBI move, it seems the much-expected consolidation will come through in the banking sector." - Kalpesh Mehta, Partner, Deloitte Haskins & Sells.