RBI draft proposals on aligning businesses may impact private banks

The list include HDFC Bank, Axis Bank, Kotak Mahindra Bank, and Federal Bank

The Reserve Bank of India’s (RBI’s) draft proposals to align businesses of banks and their non-bank subsidiaries is likely to have an impact on major private sector banks, including HDFC Bank, Axis Bank, Kotak Mahindra Bank, and Federal Bank, according to Jeffries analysts.

The RBI last week released draft proposals on ‘forms of business and prudential regulation for investments’ of banks, wherein it stated that only a single entity within a bank group (the bank and its group entities) can undertake a particular form of permissible business.

It specified that multiple entities within a bank group cannot undertake the same business or hold/acquire the same category of license/authorisation or registration from any financial sector regulator.
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Additionally, there can be no overlap in the lending activities undertaken by the bank and its group entities. Moreover, RBI has said that the non-bank subsidiary of banks will be considered upper layer NBFCs and will be subject to regulatory and other restrictions on loans and advances applicable to banks. The norms would apply two years after the final circular is issued by RBI.

According to Jeffries report, (the proposed norms) this could affect banks, including Axis Bank, HDFC Bank, Kotak Mahindra Bank, and Federal Bank, that may have overlapping business in subsidiaries.

Meanwhile, Citi analysts, in their report, have said that there is a need to monitor if recalibration of business model or merging lending businesses of group entities is recommended, according to a Bloomberg report.

Axis Bank has Axis Finance as its NBFC subsidiary, ICICI Bank has ICICI Home Finance, Kotak Mahindra Bank has Kotak Mahindra Prime and Kotak Mahindra Investments, and Federal Bank has Fedbank Financial Services.

Axis Bank’s shares closed 2.31 per cent lower on Monday at Rs 1,150.30. HDFC Bank's shares fell by 2.24 per cent, ending at Rs 1,619.65. Kotak Mahindra Bank saw a slight decline of 0.47 per cent, closing at Rs 1,800. Federal Bank's shares dropped 5 per cent, closing at Rs 184.

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt. Ltd.