Board approval must for bank entities to do same business, says RBI

RBI says bank's NBFC group entities that have not been independently identified as NBFC-Upper Layer are now exempted from listing

The Reserve Bank of India (RBI) on Friday allowed multiple entities in a bank group to undertake the same business as long as they cater to different client segments, while mandating board approval to ensure that any overlap in business has proper rationale and justification.

 

“To allow flexibility in the manner in which a bank wishes to conduct its business, the suggestion has been accepted. However, to ensure that the overlap in businesses undertaken by the bank group has proper rationale/justification, board approval is being mandated,” the central bank said on Friday.

 

Previously, in a draft circular in 2024, the RBI had proposed that only a single entity within a bank group (the bank and its group entities) can undertake a particular form of permissible business.

 

The banking sector had requested the central bank to allow multiple entities in a bank group to undertake the same business but catering to different segments based on geography, customer profile, ticket size, etc.

 

In the October policy, RBI governor Sanjay Malhotra had said that the proposed regulatory restriction on overlaps between a bank and its group entities’ businesses had been dropped from the final guidelines on “Forms of Business and Prudential Regulation for Investments,” which were issued in a draft form in October last year.

 

“The strategic allocation of business streams among group entities will be left to the wisdom of bank boards,” Malhotra said in October, adding that the RBI does not want to micromanage.

 

“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.”

 

On Friday, the RBI also partially accepted another suggestion from the industry regarding exempting non-banking financial company (NBFC) group entities of banks from upper layer regulations, especially on listing. The RBI said NBFC group entities which have not been independently identified as NBFC-Upper Layer by the central bank are now exempted from listing requirements. However, it said, restrictions for specific loan segments applicable to banks, have been made applicable to NBFC group entities to obviate any circumvention of regulations.

 

The largest NBFCs are identified as upper layer, and are regulated like banks. Currently, 15 NBFCs are classified as upper layer NBFCs, including Bajaj Finance, Shriram Finance, Tata Capital, HDB Financial Services, etc.

 

According to the RBI’s scale-based regulation for NBFCs, an NBFC, upon being classified as an upper layer NBFC, will have to publicly list on the bourses within three years of identification. 

 

Separately on Friday, the RBI rejected the industry’s suggestion for banks to be allowed to have shareholding in asset reconstruction companies (ARCs) without any restriction. The central bank proposed that banks cannot be sponsors of more than one ARC at any point in time. Further, the aggregate shareholding of a bank group in any ARC shall be less than 20 per cent of the equity capital of the ARC, it added.