RBI drops 'restriction' on business overlap by banks & group entities

Withdrawal of proposal barring overlap between banks and NBFC subsidiaries offers relief to major lenders

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The Reserve Bank of India (RBI) has withdrawn its proposal to bar any overlap between the businesses of banks and their group entities, removing a significant overhang for major banks that own shadow lenders operating in similar lines of business.

 

“Forms of Business and Prudential Regulation for Investments was issued in October 2024. It has been finalised after public consultations and will be issued shortly. The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entity(ies) is being removed from the final guidelines. The strategic allocation of business streams among group entities will be left to the wisdom of bank boards,” said RBI Governor Sanjay Malhotra on Wednesday.

 

The RBI, in a draft circular in October 2024, had stated that multiple entities within a bank group could not undertake the same business or hold/acquire the same category of licence, authorisation, or registration from any financial sector regulator. It also stated that overlapping lending activities between a bank and its subsidiaries would not be permitted.

 

Analysts had noted that the RBI’s proposed norms could impact major banks such as Axis Bank, HDFC Bank, Kotak Mahindra Bank, and Federal Bank, which have subsidiaries operating in similar business segments. For instance, Axis Bank owns Axis Finance; ICICI Bank has ICICI Home Finance; Kotak Mahindra Bank operates Kotak Mahindra Prime and Kotak Mahindra Investments; and Federal Bank owns Fedbank Financial Services.

 

The draft circular had also weighed on the initial public offering (IPO) of HDB Financial Services, as both it and HDFC Bank operate in similar lines of business. Shares of HDB Financial Services rose 2.50 per cent following the RBI Governor’s announcement.

 

Banks that own non-banking financial companies operating in similar lines of business may no longer be required to significantly reduce their stake or divest these subsidiaries. This offers relief to major banks such as Axis Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Federal Bank, and others.

 

Following the RBI Governor’s statement, shares of Axis Bank rose 1.71 per cent, ICICI Bank gained 1.78 per cent, Kotak Mahindra Bank was up 2.34 per cent, and HDFC Bank rose 1.06 per cent.