MUMBAI: The Reserve Bank’s final guidelines on the non-banking financial services businesses of banks provide flexibility on overlapping lending activities within major bank groups, helping as many 12 bank groups not radically restructure their lending businesses. The October 2024 draft guidelines had proposed that only one bank group entity could carry out a specific form of business, with no overlap in lending activities between the bank and its group entities this would have forced 12 banks with other financial services activities to revamp their whole businesses.
Though the RBI has retained several proposals from the draft in the final guidelines, the final norms give them enough operational and balance-sheet flexibilities, Crisil Ratings said in a note. The initial proposals retained in the final guidelines, Crisil said, include the applicability of upper-layer scale-based regulations for non-banking financial companies, regulatory restrictions on loans and advances applicable to banks, to NBFCs within bank groups, and the 20% ceiling on a bank group’s holding in an asset reconstruction company.
“Overall, the final guidelines aim to eliminate any regulatory arbitrage by aligning regulations across bank groups, thus contributing to structural strengthening, while providing flexibility in business conduct,” the report said.According to Subha Sri Narayanan, a director with Crisil Ratings, “if the draft guidelines had been implemented in toto, 12 bank groups, accounting for 55% of sectoral advances, would have needed restructuring of their lending businesses.
This would have impacted 2-6% of consolidated advances of these individual banks. “However, with the final guidelines permitting bank group entities to maintain overlapping lending businesses, subject to board approvals, there will be no disruption to their operations. More significantly, banks and their group entities can continue to leverage their respective strengths and serve distinct customer segments in a cost-effective manner.”
While the final guidelines have provided flexibility on the conduct of forms of business for bank groups, they have tightened the compliance requirements for entities within bank groups engaged in lending, he noted. Of the 26 bank group entities currently operating lending businesses, only two are designated as upper-layer NBFCs. The rest must comply with the norms for upper-layer NBFCs, except listing requirement, by March 31, 2028.
The guidelines have also applied restrictions on specific loan segments for bank group entities, akin to those for banks, to align risks across entities and curb regulatory arbitrage. Most NBFC and HFC subsidiaries of domestic banks are already compliant. However, if an associate lending entity is undertaking activities not permitted in the bank, it must be discontinued.
The final guidelines have also prescribed ceilings, largely carried forward from the draft, for various bank investments. According to Vani Ojasvi, an associate director of the agency, one notable restriction in the final guidelines is the 20% ceiling on bank group shareholding in an ARC. There are currently 13 ARCs in which one or more banks hold stakes. In all but two of these, shareholding by any single bank is under 20%. Wherever the shareholding exceeds this prescribed limit, banks will have to partially divest by March 2028.In sum, while the final directions have eased re-organisation requirements and potential operational disruption for many bank groups, they do enhance regulatory compliance requirements for them.