RBI Releases Draft Norms To Ringfence Banks’ Core Businesses

In a bid to tighten oversight, the Reserve Bank of India released a revised draft regulatory framework on forms of business and prudential regulation on Thursday.

In order to ringfence banks’ core businesses from other risk-bearing non-core businesses, the central bank has asked banks to seek approval before embarking on ventures through group entities.

It has also introduced investment limits in equity stakes for banks and their entities to a maximum of 30% in any investee company.

The central bank has also asked all banks to submit feedback on these proposed changes before Nov. 20. Small finance and payments banks will continue under the existing rules, the press release said.

Under forms of business, the guidelines include that multiple entities within a bank group must not undertake the same business or acquire the same category of license.

There should not be an overlap in the lending activities undertaken by the bank and its group entities.

Under prudential regulation for banks' investments, the central bank has guided that equity investment by a bank in any company, including its group entity, or individually should not exceed 10% of the bank’s paid-up share capital and reserves.

It also said that the aggregate of equity investment in factoring subsidiaries and companies must not be over 10% of the bank’s paid-up share capital and reserves. The aggregate equity investments made in all companies, including group entities and overseas investments, must not surpass 20% of the bank’s paid-up share capital and reserves.

For an investee company’s equity capital, the RBI has said that no bank must hold over 10% stake in a deposit taking NBFC, provided that this does not apply to a housing finance company.

It also said to make an investment of over 10% in the unit capital of a Real Estate Investment Trust or Infrastructure Investment Trust subject to an overall ceiling of 20% of the bank’s net worth permitted for all direct investments and exposures to Alternative Investment Funds.