UPDATE 2-Indian central bank committee recommends reshaping domestic banking industry

(Updates with analyst quotes)

MUMBAI, Nov 20 (Reuters) - A working group at India’s central bank has recommended a series of changes that could transform the country’s banking landscape by paving the way for large industrial conglomerates to set up banks.

The proposals could also allow large non-banking finance companies and niche payment banks to convert into lenders.

In a report made public on Friday, the committee recommended that banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past.

“Allowing corporates into banking is a path that the regulator should tread on carefully because how much ever ring-fencing they do, problems may crop up,” said Ashvin Parekh, an independent financial services consultant.

Analysts said the move could be aimed at pumping more capital into the banking sector and increasing competition, but warned supervisory challenges could intensify.

Bajaj Group, Piramal Group and Reliance Industries are well-positioned to expand into banking, said an investment banker who did not wish to be named.

As well as opening up the banking sector, the committee suggested adjusting the size of the stakes major shareholders can hold in a lender.

For investors not involved with the bank at the outset, or non-promoter shareholders, a uniform cap of 15% instead of a current tiered structure was suggested by the committee, which was formed in June to review ownership guidelines and the corporate structure of Indian private sector banks.

It recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.

In 2018, billionaire banker Uday Kotak, managing director of Kotak Mahindra Bank, took the central bank to court over an order from the regulator to reduce his stake in the lender to 15%.

The panel’s recommendations may also pave the way for shadow banks to convert into lenders. A Non Banking Financial Company (NBFC), or shadow bank, with assets of 500 billion rupees ($6.75 billion) and above may be considered for conversion into a bank after 10 years of operations, the report said.

India’s central bank has invited comments on the report which can be submitted until Jan. 15, 2021.

$1 = 74.0973 Indian rupees Reporting by Nupur Anand; additional reporting by Sankalp Phartiyal in New Delhi and Chris Thomas in Bengaluru; editing by Kirsten Donovan and Mark Potter