Consider approving big corporate houses to open banks- former deputy governor

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RBI Headquarter

Former Deputy Governor of Reserve Bank of India R Gandhi said the central bank needed to rethink the rules that prevent large corporate houses from becoming promoters of banks. He said that with the necessary safeguards, approval should be given to increase the stake of any one body in banks above 26 percent.

R Gandhi said that the needs and aspirations of the Indian economy are such that in view of this, there is a need to consider the entry of large sources of capital in the banking sector. This can make it easier to conduct large projects. He also advocated a renewed focus on the entire service banking model.

During his tenure of the Reserve Bank, Gandhi handled important banking regulation and supervision functions. He said that the central bank has been continuously open the application for banking license for four years but even after this no serious application has been received.

Gandhi’s remarks come at a time when the Reserve Bank formed an internal working group earlier this month to take ownership and control of a private bank. The group will consider aspects such as promoters’ stakeholding, stakeholding requirements, control and voting rights.

R Gandhi said in a seminar organized by the payments company EPS that in my view, a serious stake like 26 per cent for a promoter or a strategic investor would definitely be good for the long-term interest of the bank and the banking industry.

Referring to the exemption given to Kotak Mahindra Bank, Gandhi said that the Reserve Bank can look into such measures. In the case of Kotak Mahindra Bank, the promoter group has been allowed to hold a 26 percent stake in the long term but its voting rights will be limited to 15 percent.

He also suggested other aspects such as increasing the powers of independent directors, limiting promoters’ seats on the board of directors and their ability to influence decision making. Gandhi said that even before the nationalization of banks there were many primary problems in which things like conflict of interest, division of funds, bank’s decision based on interest of groups rather than depositors.

Gandhi said that at present RBI allows the promoter to hold 15 percent and other persons up to 10 percent. In case of troubled banks, it may also approve a higher stake. In response to a question on issues like PMC Cooperative Bank and Yes Bank, Gandhi said that company operations should be given more importance.

It is not always the level of ownership that can cause trouble. He said that professionals can also take advantage of their stand in the market and help to set up a bank. However, he said that its experience was successful in some cases and not in some cases.

On a question related to merging small banks into big banks, R Gandhi said that India is a very big country geographically and also from the perspective of diversity. So we need banks of all sizes, which can cater to everyone’s needs.

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