Role and Requirements
Role
Consolidated supervision comprises an overall evaluation of the strength of a group with a large bank. The objective is to assess the potential impact of other group companies on the bank. They take all risks run by the banking group into account, independent of where they are booked.
A major element is financial statements prepared on a consolidated basis. The combining the assets and liabilities and off-balance sheet items of banks and their related entities. As if they were a single entity. Supervisors can then measure the financial risks faced by bank groups and apply supervisory standards on a group basis, such as large exposure and connected exposure limits and minimum capital adequacy ratios.
Requirements
The Reserve Bank of India (RBI) has issued guidelines for consolidated supervision. The supervisory framework comprises:
- Consolidated financial statements.
- The Consolidated prudential returns.
- Consolidated supervision by application of prudential regulations like capital adequacy, large exposures, and liquidity gaps on a group basis.
- The Consolidated financial statements are public documents prepared and published annually, besides solo annual reports of financial institutions and their subsidiaries, and submitted to RBI.
The aim of a consolidated prudential return is to collect consolidated prudential information at the group level. It aims to capture data, in the prescribed format, mainly on the:
- Consolidated balance sheet.
- Consolidated profit-and-loss account.
- Financial/risk profile of the group.
- Operations of subsidiaries and related entities.
The Reserve Bank of India (RBI) has prescribed group prudential norms for capital adequacy and large exposures for financial institutions, considering the assets and liabilities of their subsidiaries and associates, besides prudential norms that may apply on a solo basis. For group prudential norms, it defines a group as a group of entities (which can include a bank) engaged in financial activities, with a financial institution as the parent. It has prescribed areas for compliance on a group basis for capital adequacy, large exposures, and liquidity mismatches.
International co-ordination and co-operation
The Reserve Bank of India (RBI) regularly enters memoranda of understanding and agreements for co-operation with the central banks of other jurisdictions. For instance, the RBI has entered a memorandum of understanding:
- On Supervisory Cooperation and Exchange of Supervisory Information with the Bank of Israel.
- On Supervisory Cooperation and Exchange of Supervisory Information with the National Bank of Cambodia.
- With the European Central Bank for co-operation in central banking.
- On co-operation on currency swap agreements with the Central Bank of the United Arab Emirates (UAE).
- With Bangladesh Bank for the exchange of supervisory information.
Shareholdings/acquisition of control
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Shareholdings
The requirements on shareholdings and change of control in banks in India depend on the entity.
In a private Indian bank, the Banking Regulation Act and the Reserve Bank of India (RBI) impose shareholding limits on certain types of shareholders as follows (not applicable to urban Co-operative banks, foreign banks and banks established under specific statutes):
- Promoters/promoter group: 15%.
- Natural persons (individuals): 10%.
Legal persons that are:
- non-financial institutions/entities: 10%;
- non-regulated or non-diversified and non-listed financial institutions: 15%; and
- Financial institutions that are regulated, well diversified and listed, supranational, public sector or the government: 40%.
- Further, a bank cannot gain equity shares in another bank if the acquisition leads to the gaining bank holding 10% or more in the other bank’s equity capital.
The RBI can in certain circumstances allow an entity to gain shares in a domestic private bank over the above limits. Sometimes, such as new banks set up under a holding company. It has provided promoters a time limit in which they must dilute or divest their shareholding to meet the above limits.
Despite the shareholding limits, it limits voting rights to the ceiling notified by RBI under section 12(2) of the Banking Regulation Act, which is currently 15%.
Further, an acquisition of shareholding/voting rights of 5% or more of the paid-up capital of a bank or total voting rights of a bank is subject to prior approval from the RBI. A person permitted by RBI to have a shareholding of 10% or more in a bank is subject to a minimum holding period of five years.
For a foreign banking company operating through a branch in India, there are no specific regulations on a change in its shareholding or acquisition, but this may be subject to a condition in its banking license. In addition, it is advisable to notify the RBI of the acquisition. The particularly if it results in a change in control of the entity (when issuing the license to the foreign entity. The RBI would have considered its promoters and major shareholders).
Foreign investment
Acquisition of shareholdings by foreign entities in an Indian bank is subject to the limits and conditions in the Foreign Direct Investment (FDI) policy issued by the government, and to any specific requirements in the relevant bank’s license.
Under the latest FDI Policy (June 2016), foreign investment in domestic private banks from all sources is permitted up to 49% without approval, and up to 74% with government approval. At all times, at least 26% of the paid-up capital must be held by residents. Except in case of a wholly owned subsidiary of a foreign bank.
The High Court has authority to order the winding up or liquidation of a bank. Its jurisdiction is based on where the registered office of the bank is located (for a bank incorporated in India) and where the principal place of business is located (for a bank incorporated outside India).
Under the Banking Regulation Act, the following can apply to wind up a banking company:
The central government can direct the Reserve Bank of India (RBI) to inspect or report on a bank. After examining the report and giving the bank an opportunity to respond. If the central government believes that the bank’s affairs are detrimental to the interests of its depositors. It will direct the RBI to apply to wind up the bank.
The RBI can start the winding up of a bank if the:
- bank does not comply with its minimum capital and reserve requirements;
- It cancels banks’ license;
- It prohibits the bank from accepting fresh deposits, under certain provisions of the Banking Regulation Act or RBI Act; or
- RBI believes that the bank cannot pay its debts, or is continuing to the detriment of its depositors.
The bank itself can apply for voluntary winding up (solvent) if the RBI certifies that it can pay its debts in full. Under the Banking Regulation Act. Once an order for winding up a bank pass by the High Court. A liquidator attached to the High Court appoint to conduct the liquidation. The RBI can also apply to the High Court to appoint as the liquidator.
There are no statutory provisions for bank resolution. However, under the Banking Regulation Act, a bank unable to temporarily pay its debts can apply to the High Court for a moratorium to stay continuance or commencement of proceedings against it. The High Court can grant this moratorium for up to six months.
A Reserve Bank of India (RBI must support the application) report showing that if it grants the moratorium, The bank will pay its debts. The High Court can grant such relief even without a report from the RBI. But it will call the report for and it may change the order for relief.
The High Court can also appoint a special officer to take control of the bank’s assets and books in the interest of its depositors. If the RBI applies to the High Court to wind up the bank. The High Court will not extend the moratorium period.
The Ministry of Finance has recently released for public comment the draft Financial Resolution and Deposit Insurance Bill, 2016 for resolving financial firms, including banks. It proposes to, among others:
- Provide speedy and efficient resolution of financial firms in distress.
- Establish a resolution corporation.
- Provide deposit insurance for consumers of certain categories of financial services.