RBI overlap relief averts 2-6% hit to bank groups' advances, says CRISIL

CRISIL said RBI's final guidelines allowing overlapping lending within bank groups avert a 2-6 per cent hit to advances for 12 large groups, while keeping key NBFC and ARC proposals

If not for the relaxation provided by the Reserve Bank of India (RBI) in its final guidelines on the overlapping of lending activities within a bank group, 12 bank groups accounting for 55 per cent of sectoral advances would have had to restructure their lending businesses, affecting 2–6 per cent of the consolidated advances of these individual banks, domestic rating agency CRISIL said in a report on Tuesday.

 

What does CRISIL say is the impact of RBI’s final overlap relaxation? 

“However, with the final guidelines permitting bank group entities to maintain overlapping lending businesses, subject to board approval, 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,” said Subha Sri Narayanan, director, Crisil Ratings.

 

What did RBI’s draft guidelines propose on overlapping lending within groups? 

The draft guidelines released in October 2024 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. While the overlap regulations have been relaxed, RBI has retained several proposals from the draft in the final guidelines.

 

Which key proposals have been retained in the final guidelines? 

These include the applicability of upper-layer scale-based regulations for non-banking financial companies (NBFCs), regulatory restrictions on loans and advances applicable to banks to NBFCs within bank groups, and the 20 per cent ceiling on a bank group’s holding in an asset reconstruction company (ARC).

 

What do the guidelines mean for NBFCs within bank groups? 

According to the report, 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 the 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.

 

What changes apply to bank stakes in ARCs under the new ceiling? 

“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 less than 20 per cent. Wherever the shareholding exceeds this prescribed limit, banks will have to partially divest by March 2028. Any material change in ownership, as and when it happens, would be appropriately factored by Crisil Ratings into the credit profile assessment of such entities,” said Vani Ojasvi, associate director, Crisil Ratings.