RBI Reviews Bank Ownership Rules Amid Push For Foreign Investment

The Reserve Bank of India (RBI) is carrying out a comprehensive review of its shareholding and licensing regulations for banks. This step will have a substantial impact on the ownership and management of banks in the country. The options being explored include relaxing foreign ownership restrictions, which can attract more long-term foreign capital into the Indian banking system.

In an interview to the Times of India, RBI Governor Sanjay Malhotra assured that the central bank is examining all dimensions of existing regulations. "We are examining this in totality as part of our internal examination. We will review all aspects of the eligibility conditions," he added. The assurance has come at a time when foreign interest in Indian banks is picking up and there is a need for big, well-capitalised banks.

Foreign direct investment (FDI) in private sector banks under existing regulations is restricted at 74 per cent. No one financial entity, whether foreign or local, is permitted to own in excess of 15 per cent without the special approval of the government. Promoters have to give up the holding to 26 per cent within a space of 15 years. Furthermore, even if the shareholder has above 26 per cent holding, voting rights will be no more than 26 per cent.

These regulations were framed to ensure a diversified shareholding base and prevent concentration of power. But now they are being reconsidered in the wake of recent events, such as a huge foreign investment transaction in an Indian private bank, where a Japanese lender committed to buying a 20 per cent stake. The RBI also considers whether such restrictions are still necessary or if they are stifling the growth potential of Indian banks.

The RBI governor also said that Indian banks must scale up big enough to underpin the country's expanding economy. He further said that the banking system is strong and stable now and that there is no imminent threat to its health. Yet he did accept that changes in structure might be necessary in order to build long-term resilience.

The review is expected to also cover the RBI's licensing norms — particularly for differentiated banks such as small finance banks and payments banks. These categories were introduced to widen financial access and promote financial inclusion, but the RBI is now reassessing whether the existing licensing framework is still fit for purpose.

Any step towards relaxing shareholding regulations might be a welcome move from the viewpoint of investors. Relaxed rules may enable banks to introduce strategic overseas partners, raise funds more effectively, and avail themselves of international best practices in risk management and governance. It may enhance competition and innovation in the sector too.

Though the review is yet in an internal phase, any changes suggested are likely to be made public for public hearing. This would enable banks, investors, and other stakeholders to give comments prior to the finalisation of the new norms.