Small Bank Regulation – Bandhan Bank holding of promoters

INTRODUCTION

1.1 ABSTRACT

The role of RBI changed alot over the period of time. Earlier it was a perception that it only has to confine credit control by changing different monetary policy depending on the economic environment in the national level as well as international level. By passing of The Reserve Bank of India Act, 1934 and even various amendments made bring the role of RBI always precise and stabilising the various work relating to monetary policy or currency function. Thus, RBI being the central bank adherence to its rules and regulations is mandatory and the aftermath due to its non-compliance faced by the bank brings out the view that the bank cannot function freely without meeting the needs of the RBI. Over the last few years our banking industry has brought numerous changes out of which the recent change is emergence of Small Finance Bank.

This research paper discusses thoroughly various aspects of the subject which are crucial in understanding the purpose of this research study. The paper speaks about Bandhan Bank which was initially incorporated as a Microfinance Company. Subsequently with growth and time and mainly to serve the purpose for which it was brought into being, the Bank has taken a new form of being on par with the private and state-owned banks. The sole idea of establishing Bandhan Bank is to pay the heed to and provide to the needs of the people who are overlooked by the banking system and furnish them with various services especially the poor region.

1.2  AIM

This research paper aims to describe in detail the various RBI regulations and guidelines which the bank is required to adhere to for smooth functioning and serving the need of their customers as well as the licensing norms with promoters which the bank is required to comply with and consequences arising out of defaults in complying with RBI regulations.

1.3 STATEMENT OF PROBLEM

Bandhan Bank is a category of commercial bank whose main aim to serve the needs of untouched and underserved segments of the society. The main focus is on the weaker section of the society. How the bank is important and a mean to financial aid to poor and in order to keep itself going how bank needs to follow RBI rules.

1.4  HYPOTHESIS 

How micro finance has proved to be a boon to poor segment of the society?

1.5  RESEARCH METHODOLOGY

The research will be a doctrinal study. This paper will be based from various readings and analysing statutory provisions. The Library-based Research method will be followed for deriving the answer for the subject of the research paper. The Library-based Research method will be followed for deriving the Hypothesis. The search will be conducted on the basis of secondary sources such as books, online articles available freely as well as on legal databases. The paper is based on pure theoretical research.

1.6  LITERATURE REVIEW

The Author Kumaraswammy Manepalli¹ seeks to uphold the importance of microfinance bank which is established and to what extent it will be useful. Earlier commercial bank did not play any role in micro financing. There were various NGOs which used to work and microfinance lending activity used to take place. Bandhan bank is a small finance bank originated as a NGO which is performing the function of micro finance lending bank. Whereas, next author Aditi Lahiri² mainly focused on how small finance banks functioned under the various regulations of RBI. He also further tells about the licensing of small finance bank and the extent of shareholding by promoters as per the guidelines. He also speaks about the initiative taken by RBI for financial inclusion by providing banking services to the poor segment of society.

RBI’s ROLE TOWARDS POOR SEGMENT

The Reserve Bank of India³ which is known as an Apex or Central Bank in India has been the imbibed with various regulatory functions in order to supervise the comprehensive financial system in India. The RBI being the apex bank is entrusted with numerous vital functions to operate for overall development of banking sectors in India. A function which stands out from all is to act as a regulator and supervisor of all the banks subordinate to it. In other words, RBI is a central controlling body of Indian Financial System. The establishment of Banking Regulation Act, 1949 has been proved to be of great aid to the RBI. The Act blankets numerous features concerning banking activities in India, bearing with an aim to safeguard the interest of depositors as well as to hinder the unlawful use of powers by the authorities of the banks. This Act then vests various powers into the RBI for smooth functioning of the banking system and its adequate development.

Taking into consideration and cater to the needs of the particular sections of the society which are not served or far from the reach of banking services, the RBI took one of the biggest steps toward the situation for serving the financial need of the poor segments of the society. RBI brought the group of class or set of people who were deprived of the banking opportunities within its scope by providing them access to basic banking services like savings, FD, etc.,. This segment of society covered small and marginal farmers, low-income group, small capital businesses, micro industries and the industries with inadequate technologies. Various Acts undertaken for each specific purpose as well as the rules of framework and guidelines of the RBI governs these banks. These banks are given license under the Section 22⁴ and are incorporated as public limited company⁵.

BANDHAN BANK

Bandhan Bank is a type of commercial bank whose main aim to serve the needs of untouched and underserved segments of the society providing with access to various banking services and aid the financial requirements of the people and develop welfare opportunities for them in the society. Bandhan Bank Limited as a Company was registered under Companies Act, 2013 to be as a wholly owned subsidiary of Bandhan Financial Holdings Limited (BFHL) which is in turn owned by Bandhan Financial Services Limited (BFSL) making this as one of the largest micro finance corporation in India. Later when this microfinance incorporated company received an approval in the form of license under section 22 from the RBI on 17^th June, 2015 it was converted into a Universal Bank. In 23^rd August, 2015 the bank commenced its normal financial banking activities. Bandhan Bank became the first bank which was put in as a private bank in the eastern region of India, having its headquarters at Kolkata. Bandhan Bank started growing its business in 2016 by establishing several branches and increasing its general banking services. The weaker section of the society has been appropriately advised about savings and even on micro loans for raising their standard of living as well as for the any business where financial support needs arise. Bandhan bank through its unique services towards the backward areas gave rise to the economic growth and welfare of the society.

In 2018, the bank came out with an IPO⁶ and got listed itself at the Bombay Stock Exchange. This scenario gave rise to certain circumstance wherein the shareholding of its promoters was more than standard requirement provided by the RBI.

RBI GUIDELINES REGARDING PROMOTERS SHAREHOLDING⁷

The RBI guidelines speaks that shareholding of a promoter/s and/ or NOFHC (Non Operative Financial Holding Company) should be at the lowest of 40% of the paid-up equity capital throughout during the beginning of the business of the bank secured for the period of first five years. The guidelines also state that if or under any given circumstances this initial shareholding of the promoter/s and/ or NOFHC exceeds the standard limit of 40%, the bank is required within its first three years to pare the shareholding to 40%. During the period of above mentioned first five years bank decides to increase its voting equity capital promoter/s and/ or NOFHC required to maintain the stake of 40% of the raised up voting equity capital for five years from the beginning the of business of the bank. The RBI guidelines further states that the shareholding of the NOFHC should not be more than 20% of the paid-up voting equity capital of the bank during the first 10 years from the commencement and also further provides that it should be within a limit of maximum 15% during the first 12 years from the commencement of the banking business.

Small finance banks are required to list themselves on a recognized stock exchange compulsorily within a period of 3 years subsequent to the net worth of the bank strikes to Rs. 500 crore for the first time. Banks having net worth below the threshold limit are not under the obligation to get listed and could take up the listing activity voluntarily. When the application is made, any substantial change which to be made in the shareholding pattern of the entity as well as the period between the application and granting of license has to be with the prior permission of the RBI only. Also, any subsequent change has to be made with the prior approval of RBI.

PROMOTERS SHAREHOLDING DILUTION

As per the new RBI guidelines relating to new licensing norms, the banks which are offering universal services have to bring their promoter shareholding down to 40% within three years from the commencement of business. Bandhan Bank got its license to start operations as a universal bank on 23^rd August, 2015. It had become the first microfinance company in India to get license for universal bank. After the RBI in their new licensing norms, Bandhan Bank was advised to reduce its promoter shareholding to 40% within the time limit of three years of its operations. Bandhan bank had issued an IPO in the year March, 2018. It was heavily oversubscribed by 14 times. Before this IPO was made the shareholding of promoters was nearly 89%. The reason for IPO was to reduce the promoter shareholdings, but it could only reduce from 89% to 82.28% far away to reach the target limit of 40%.

Bandhan Financial Holding Company (BFHL) is the holding company of Bandhan Bank and its promoter holding is nearly 82%. The RBI as a penalty withdrew the permission of opening new branches and also freeze the remuneration of MD & CEO Chandra Shekhar Ghosh till further order was passed. However, the few of all the restrictions imposed by the RBI were lifted due to merger with the GRUH finance (money lender) which brought down the stake of the promoters to 60.96% in October, 2019. The RBI by its order, imposed a monetary penalty⁸ of One crore on the bank due to failure to comply with the RBI guidelines concerning promoters holding. It issued a show cause notice to the bank asking the bank to state the sufficient reason for not imposing the penalty due to non-compliance of norms of the RBI. After considering the reply of the bank and the submitted documents, RBI concluded that the bank had defaulted to comply with the RBI licensing guidelines and levied penalty on the bank. This penalty was levied in pursuance to powers vested in RBI under provisions of Section 47 A (1) (c)⁹ read along with Section 46(4) (i)¹⁰ of the Banking Regulation Act, 1949.

After the abovesaid merger, the bank still had to reduce the promoter shareholding from 61% to 40% and had two options of which the first is the offer for sale where the bank needs to decrease its share by selling its equity share and the second one is again merger and acquisition. The Bank decided to go for offer for share where they sold the shares to foreign investors like Caladium Investment, Camas Investment Limited, Morgan Stanley Asia Singapore, Copthall Mauritius Investment, etc. In this manner the bank could possibly bring down the shareholdings and now it is within the limits of the norms of RBI.

As per the quarterly report¹¹ for the month September 2020 the shareholding pattern of promoters shows that the holding is now 40% as per the guidelines and the total number of fully paid up equity shares held is 64,41,15,851.

SUGGESTION

India with an average annual rate of growing combined with limited resources to finance the under penetrated segment of the society which in turn hinders the economic growth to reach at its ultimate aim. Establishment of the Bandhan Bank has been an equivalent to act as a catalyst to serve or contribute towards financial needs and provide aid to this segment for proper standard of living. Importance of micro finance was felt by the potential with its bears to uplift the untouched group a set of clash of the society. Bandhan bank with its unique business structure has been proved to be a big help to uplift the backward economic region. Because of micro loans many people are able to establish their own business or their own needs and have a standard of living. Develop such product and services that efficiently tackles to the need of poor people. The micro finance credit allowed by the bank is small in number along with early repayment standard, the rate of interest charged on the said amount should be at a nominal rate in order to provide the access of the facility in large number. It needs to expand the business by adding new branches and also by improving its efficiency of Doorstep Services Centres (DSC). Non-compliance on the part of Bandhan bank concerning the licensing guidelines and conditions and the subsequent consequences faced by the bank was a period of hardship to the bank. RBI being the regulator of the entire bank, the bank established under RBI and to whom all the norms mentioned in the Act and all the ancillary rules and regulations as well as conditions have to be mandatorily followed by the bank.

CONCLUSION

Bandhan Bank is playing an important role in reducing poverty and uplifting the backward region by better standard of living. While the bank is moving forward with its core aim and protecting the interest of its stakeholders, the bank has to, at the same time, keep intact the pace of its growth and the quality offered. Since the main focus is on rural areas, the service which is provided meets all the requirements suitable. Recently, Bandhan bank completed five years of functioning and has a vision in next five years to increase the functioning by expanding its operation. The bank is also focusing towards microcredit loans to MSME borrowers for better efficiency and good economic growth as well as providing housing loans to rural areas. The bank is following all the norms which is given by RBI and the promoter shareholding is in the limit mentioned. With good plan and following of norms, the bank in coming years will be more in good position and also will reach the maximum areas to provide financial aid.

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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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REFERENCE

ARTICLES

• Aditi Lahiri, “Small Finance Banks – The Working And Regulations”, Amie Legal, 22 April 2020 (08/01/2021, 9.00)

https://amielegal.com/small-finance-banks-the-working-and-regulations/

• Bandhan Bank https://www.bandhanbank.com/ (07/01/2021, 13.01)
• “Bandhan Bank Crisis: A Case Study”, Notes Learning, 18 September 2020, (10/01/2021, 18.30) http://noteslearning.com/bandhan-bank-crisis-a-case-study/
• BW Online Bureau, “RBI imposes Monetary Penalty on Bandhan Bank”, Business World, 30 October 2019 (10/01/2021, 21.00) http://www.businessworld.in/article/RBI-Imposes-Monetary-Penalty-On-Bandhan-Bank-/30-10-2019-178221/
• Kumaraswammy Manepalli,   M.  Ramkumar,  “A  Case  Study  Analysis  of  Bandhan BankMicrofinance  Services:A  customer  centric  approach”,  International  Journal  of Scientific Research, Volume 8, Issue 12, ISSN No. – 2277- 8179, December 2019 (10/01/2021, 23.00)

https://www.worldwidejournals.com/international-journal-of-scientific-research-(IJSR)/article/a-case-study-analysis-of-bandhan-bank-microfinance-services-a-customer-centric-approach/MjM2MDI=/

STATUTES

• Reserve Bank of India Act, 1934.
• Banking Regulation Act, 1949.

Notes:

¹Kumaraswammy Manepalli, Dr. M. Ramkumar, “A Case Study Analysis of Bandhan BankMicrofinance Services:A customer centric approach”, International Journal of Scientific Research, Volume 8, Issue 12, ISSN No. – 2277- 8179

²Aditi Lahiri, “Small Finance Banks – The Working And Regulations”, Amie Legal, 22 April 2020

³Reserve Bank of India Act, 1934.

⁴ Banking Regulation Act, 1949, § 22, Act of Parliament, 1949 (India).

⁵ Companies Act, 2013, §2 (71), Act of Parliament, 2013 (India).

⁶Companies Act, 2013, §23, Act of Parliament, 2013 (India).

⁷ Press Releases, “RBI releases guidelines for licensing of New Banks in the Private Sector ”, Reserve Bank of India, 22 February 2013, (08/01/2021, 11.00).

⁸Press Releases, “Reserve Bank of India imposes monetary penalty on Bandhan Bank Limited”, Reserve Bank
of India, 29 October 2019, (08/01/2021, 10.00).

⁹Banking Regulation Act, 1949, § 47A (1) (c), Act of Parliament, 1949 (India)

¹⁰Banking Regulation Act, 1949, § 46(4) (i), Act of Parliament, 1949 (India).

¹¹ “Statement showing shareholding pattern of the Promoter and Promoter Group”, BSE India, (09/01/2021, 13,00)

https://www.bseindia.com/corporates/shpPromoterNGroup.aspx?scripcd=541153&qtrid=107.00&QtrName=September%202020