Commercial banks may not need RBI approval for floating subsidiaries

Regulator to emphasise on non-duplication of businesses

For commercial banks to float subsidiaries, approval from the Reserve Bank of India (RBI) may not remain mandatory, according to highly placed sources. 

However, if the subsidiary is for insurance or asset management, the bank must take approval from the respective regulators. The central bank is  considering the matter.

 

The move, sources said,  is to make banks’ doing  business easier. The regulator has been streamlining regulations for the financial  sector to enhance ease of doing business, and this move is a step in that direction. 

Section 6 of the Banking Regulation Act specifies the businesses a bank can be in — beyond standard banking. If banks are not required to take approval, then it would be a marked departure from current practice.

 

In almost two decades, the RBI has not approved any bank setting up subsidiaries. In the past, many large private banks had requested the regulator for permission to set up subsidiaries for businesses such as lending and infrastructure finance, but  approval did not come.

 

Further, regarding the forms of businesses conducted by banks, the regulator will come up with draft norms proposing that arms of banks stay out of the kind of lending the parent does. Instead, they should focus on segments the parent is not present in. 

“If a bank focuses on housing loans, then the subsidiary can focus on affordable housing or loans against property, for example. The idea is that there should not be duplication of work,” said a source. 

The Banking Regulation Act mandates that a bank on its own should carry out its core businesses, such as 

accepting deposits and  lending, departmentally. 

During the October monetary policy review, the RBI said the draft guidelines on forms of business and investment for banks, issued in October last year, had been finalised and would be shortly issued.

  RBI Governor Sanjay  Malhotra had said the regulator would not micro-manage banks’ decision making.

 

“We believe that the banks will take a conscious, considered, balanced view, depending on their needs as to how they wish to conduct their own business that is why we have just left it to them,” Malhotra said during the post-policy press conference.

While the proposed bar on overlap in the businesses undertaken by a bank and its group entity is being removed, the regulator will now propose that banks focus on segmentation within similar lines of business. 

The final norms on this matter envisage streamlining the activities of banks and their group entities while providing more operational freedom to them and non-operative financial holding companies (NOFHCs) for equity investment and setting up group entities, respectively. 

Banks do not need approval for setting up NOFHCs. 

Some large private banks are proposing listing their subsidiaries after the RBI proposes removing the ban on overlap in businesses undertaken by a bank and its group entity, Axis Finance, the wholly owned non-banking finance subsidiary of Axis Bank, is set to become an upper-layer non-banking financial company soon, looking to list it on the bourses, said the lender’s senior management last week during the post-earnings media call.  

Ease of doing business

• RBI streamlining norms for financial sector to boost ease of doing business
• Will propose that banks should focus on segmentation within similar lines of business
• No bank approved to set up subsidiaries in nearly two decades
• RBI governor has said regulator will not micro-manage banks’ decisions-making