RBI eases rules by dropping overlap curbs on banks, group entities

RBI has removed proposed restrictions on business overlaps between banks and their group entities, giving operational freedom and boosting major lenders with NBFC arms

The Reserve Bank of India (RBI) on Wednesday said it has dropped the proposed restriction on overlaps in business activities between banks and their group entities from the final guidelines on “Forms of Business and Prudential Regulation for Investments”. The draft guidelines issued last year had suggested barring such overlaps. This removes a major overhang on some of the largest banks in the country, including HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank, which have non-banking financial companies (NBFCs) doing overlapping businesses.

 

“Removal of regulations that restricted banks and NBFCs from doing overlapping business is positive for all banks like HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank, which have NBFCs doing overlapping businesses,” said Suresh Ganapathy, managing director, head of financial services research, Macquarie Capital.

   

Following the announcement, HDFC Bank’s shares closed 1.48 per cent higher, Axis Bank gained 2.43 per cent, ICICI Bank rose 1.77 per cent, and Kotak Mahindra Bank advanced 3.45 per cent.

 

On Wednesday, RBI Governor Sanjay Malhotra said the proposed regulatory restriction on overlaps between a bank and its group entities’ businesses has been dropped from the final guidelines. The draft guidelines on “Forms of Business and Prudential Regulation for Investments” were issued in October last year.

 

“The strategic allocation of business streams among group entities will be left to the wisdom of bank boards,” Malhotra said, 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,” he said.

 

The draft circular had proposed that only a single entity within a bank group can undertake a particular form of permissible business.

 

Further, it had specified that multiple entities within a bank group cannot undertake the same business or hold/acquire the same category of licence/authorisation or registration from any financial sector regulator. Additionally, it had stated there can be no overlap in the lending activities undertaken by the bank and its group entities.

 

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.

 

This draft circular weighed on HDB Financial Services initial public offering (IPO) as one of the risk factors mentioned by the lender in its red herring prospectus was that HDFC Bank, the promoter, may need to significantly reduce its ownership in the company, potentially below 20 per cent, if the RBI’s October 4, 2024, draft circular was adopted as is. The company had stated that such a requirement could have a material adverse effect on its business operations, financial position, and share price.

 

Following the latest announcement by the RBI, HDB Financial Services share price jumped 2.6 per cent on the BSE to close at ₹769.60.

 

The draft circular had also dampened Axis Bank’s plans to sell a stake in its NBFC arm Axis Finance as investors awaited clarity on the guidelines before pricing the transaction. The bank intends to divest part of its shareholding in the subsidiary.

 

“Based on feedback and review, the proposed bar on overlap in the businesses undertaken by a bank and its group entities is being removed. The (new) circular envisages to streamline the activities being undertaken by banks and their group entities while providing more operational freedom to the banks and NOFHCs for equity investments and setting up group entities, respectively,” RBI said in a statement.

 

NOFHC stands for non-operative financial holding company.

 

Industry experts said this is a welcome move, given that the various subsidiaries of banks have overlapping business as they cater to different profiles of customer segments.

 

SBI Research said this reinforces the trust in supervisory mechanism of individual banks, and that enhanced governance guidelines perused through systemic risks and arm’s length policy should continue to be watched by the regulator.