RBI panel bats for continuation of NOFHC as preferred structure for banks

Reserve Bank of India’s panel on private banks has backed the continuation of Non-Operative Financial Holding Company (NOFHC) as the preferred structure for setting up new universal banks.

However, NOFHC may be mandatory only where the individual promoters and promoting entities/ converting entities have other group entities.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services (APAS), said that NOFHC structure is important to ring-fence interest of depositors and enhance corporate governance in banking entities.

Banks, currently under NOFHC structure, may be allowed to exit from such a structure if they do not have other group entities in their fold, the RBI panel said.

While banks licensed before 2013 may move to an NOFHC structure at their discretion, these banks will have to migrate to the NOFHC structure within five years after attaining a tax-neutral status.

The Reserve Bank should engage with the government to ensure that the tax provisions treat the NOFHC as a pass-through structure, said the panel.

The panel further said that concerns about banks undertaking different activities through subsidiaries joint ventures (JVs)/associates should be addressed through suitable regulations till the NOFHC structure is made feasible and operational.

The Reserve Bank may frame suitable regulations and the banks must be fully comply with them within two years.

The panel said that the bank and its existing subsidiaries, JVs and associates should be barred from engaging in similar activity that a bank is permitted to undertake departmentally and the term ‘similar activity’ should be defined clearly.

If a group entity desires to continue undertaking any lending activity, then bank should not undertake that line of business departmentally. The group entity shall be subject to the prudential norms as applicable to banks for the respective business activity.

Banks should not be permitted to form or acquire or associate with any new entity (subsidiary, JV or Associate). They should not be permitted to make fresh investments in existing subsidiary, JV or associate for any financial activity. Investments in ARCs may be as per extant norms.

However, banks may be permitted to make total investments in financial or non-financial services company which is not a subsidiary/JV/associate upto 20 per cent of the bank’s paid up share capital and reserves.