Large banks may have to review their operations, including forms of business and investment in any group entity or in other financial/non-financial services company or other equity investments, to ringfence their core business from other risk bearing non-core businesses.
As per RBI’s draft circular on Forms of Business and Prudential Regulation for Investments,banks have to ensure that there is no overlap in the lending activities undertaken by them and their group entities. Further, the RBI plans to tighten norms regarding banks’ equity investment in any company, including group entity.
The central bank said only a single entity within a bank group (the bank and its group entities) can undertake a particular form of permissible business.
Multiple entities within a bank group cannot undertake the same business or hold/acquire the same category of license/authorisation or registration from any financial sector regulator. Further, there should be no overlap in the lending activities undertaken by the bank and its group entities.
Banks such as HDFC Bank, ICICI Bank and Federal Bank may have to take a long, hard look at their non-bank lending arms if the circular is implemented.
RBI emphasised that a group entity cannot be used to circumvent regulations/guidelines applicable to the parent bank or other group entity to carry on any business activity which is not permitted otherwise.
Limits on investments
Equity investment by a bank in any company, including its group entity, individually, has been capped at 10 per cent of the bank’s paid-up share capital and reserves, as per the last audited balance sheet or a subsequent unaudited balance sheet, whichever is lower.
RBI said the aggregate equity investments made in all companies, including group entities and overseas investments, should not exceed 20 per cent of the bank’s paid-up share capital and reserves as per the last audited balance sheet or a subsequent unaudited balance sheet, whichever is lower.
A bank cannot hold more than 10 per cent in the equity of a deposit-taking NBFC. However, this cap does not apply to holding in a Housing Finance Company.
A bank cannot hold 20 per cent or more in the equity capital of any non-financial services company. However, investments up to 30 per cent (subject to statutory and regulatory stipulations for investment in the equity capital of such investee company) shall be permissible, subject to conditions.
A bank can sponsor only one Asset Reconstruction Company (ARC) at any point in time. Further, the aggregate shareholding of a bank group in any ARC should be less than 20 per cent of the equity capital of the ARC, per the draft circular
RBI said Banks should ascertain the risks arising on account of equity investments in Alternative Investment Funds done directly or through their group entities.