Bandhan, IndusInd, Kotak May Benefit From RBI's New Private Bank Norms

The Reserve Bank of India's new norms on private bank ownership and corporate structure could benefit a small set of existing lenders, analysts said.

The banking regulator on Friday accepted 21 out of the 33 recommendations made by an internal working group last year. The RBI steered clear of allowing large business houses into banking, as was suggested by the working group. But a recommendation to raise the maximum promoter stake in banks over the long run to 26% from 15% currently has been approved.

Bank promoters, who had reduced their stake to below 26% owing to the current norms, will be allowed to raise their holdings within the new cap.

"It has already been implemented in the case of Kotak Mahindra Bank... This could be beneficial for IndusInd Bank (if the RBI does not have issues related to promoters)," analysts at Emkay Global said in a note on Monday.

Uday Kotak and other family members hold 26% stake in Kotak Mahindra Bank, according to exchange data. This was permitted as a special dispensation after a legal battle between Kotak and the RBI ended last year.

IndusInd Bank To Benefit?

Ashok Hinduja, chairman, IndusInd International Holdings Ltd., said the promoter of IndusInd Bank was looking forward to the operational guidelines, so they may infuse further equity in the bank.

"This measure of increased promoter holding will be of benefit to all stakeholders: the regulator, the banking institution and its clients, particularly at this time when Indian economy is poised for exponential growth," Hinduja said in a statement on Saturday.

According to Amit Khurana of Dolat Capital, while Kotak Mahindra Bank will be a natural beneficiary of the new norms, IndusInd Bank will take some time to be considered for a re-rating.

"The recent troubles at IndusInd Bank's microfinance unit have continued to sour market sentiment. It will be some time before the bank's stock is considered for a re-rating," Khurana said.

IndusInd Bank's promoters had earlier sought permission from the regulator to raise their equity stake in the bank to 26%, but did not get the go-ahead. Currently, promoters hold a 16.54% stake in IndusInd Bank, according to exchange data.

"Permitting higher shareholding up to 26% will enable promoters to infuse more funds, which are critical for the expansion of banks and work as a cushion to rescue the bank in times of distress/cyclical downturn," analysts at Nirmal Bang said in a report dated Nov. 28.

Higher Non-Promoter Stake May Help Bandhan

As part of its new norms, the RBI has also changed the rules for non-promoter stake in banks. Non-promoter shareholding will be capped at 10% of the paid-up voting equity share capital of the bank, in case of natural persons and non-financial institutions or entities.

In case of financial entities, supranational, public sector undertaking or government, the cap for non-promoter shareholding is set at 15%.

"If this is allowed, then it is possible that HDFC may not have to cut its stake in Bandhan (Bank) to 10%," Emkay analysts said.

Housing Development Finance Corp. had purchased a 9.89% stake in Bandhan Bank in October 2019. This was done as part of a two-way transaction where the housing financier's subsidiary Gruh Finance was merged with Bandhan Bank.

The HoldCo Structure

As part of the new rules, the RBI said it prefers the non-operative financial holding company or NOFHC structure. However, the structure will be mandatory only in cases where individual promoters, promoting entities and converting entities have other group entities.

According to analysts at Nirmal Bang, more clarity is needed on the double taxation aspect of the NOFHC structure.

"For existing banks with significant para-banking subsidiaries, attainment of tax neutrality is critical before moving to a NOFHC structure," the analysts said.

Existing banks under the NOFHC structure may be allowed to exit such a setup if they do not have any other group entities in the fold.

"The RBI has given in-principle approval to IDFC First Bank/Bandhan Bank, but IDFC will have to divest stake in MF/tech businesses for a reverse merger with IDFC First Bank, while Bandhan Bank is not keen on diluting the structure as of now," Emkay Global said in its report.

The working group had recommended that payments banks with three years of operational experience could apply to convert into small finance banks. However, the RBI has retained a five-year minimum period before any such conversion can be considered.

"This means Paytm can apply for converting its payments bank to small finance bank in mid-2022 when it completes five years of operation," Macquarie Research said.

According to Macquarie analysts, the guidelines may also point to a reluctance from the banking regulator to liberalise its bank licensing framework.

"The fact that the RBI has mulled upon the recommendations for the last two years and still hasn’t pressed the button on issuance of bank licences implies that the probability of issuing digital banking licences as suggested by government’s policy think-tank NITI Aayog remains low," Suresh Ganapathy and Param Subramanian of Macquarie, said in a report on Monday.

This is negative for companies such as Paytm, which have aspirations of a bank licence, Ganapathy and Subramanian said.

Watch a conversation with Suresh Ganapathy of Macquarie on the new private bank ownership rules below: