New RBI cap on intra-group exposure positive for banks: Report

The Reserve Bank imposing a cap banks' exposure to group entities will help contain possible contagion from failure of a group entity to core commercial banking operations, according to a report.
Besides, the cap will not have any immediate negative rating impact on them, the report added.
"We don't expect the new regulation to have any immediate negative rating impact on the financial companies which derive creditworthiness from their parent banks' willingness and ability to provide timely and adequate support," said the report by India Ratings on the impact of the latest RBI move.
Typically, NBFCs, broker-dealers and insurance arms/joint ventures of banks are rated based on the expectations of extraordinary liquidity and/or equity support from parent banks in case of a crisis.

The Reserve Bank of India (RBI) had recently imposed new curbs on banks investing in their group companies in a bid to mitigate the financial risk from concentration of business.
The cap is aimed at ensuring that banks maintain arm's length relationship in dealings with their own group entities, meet minimum requirements with respect to group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures, RBI had said.

Banks are allowed to invest 5 per cent of their paid-up capital in the case of NBFCs and unregulated financial services companies. The limit is 10 per cent for regulated financial services companies. It also fixed an aggregate group exposure limit for intra-group deals at 20 per cent for all financial and non-financial entities taken together and 10 per cent for non-financial and unregulated entities.

The guidelines will be effective October 1.
India Ratings said rules limiting capital impairment from the failure of an internal group entity are viewed to be positive, especially as some group entities may have elevated exposure to sensitive sectors.