The Reserve Bank of India’s (RBI) has recently released the draft guidelines on amending the regulatory framework for banks to undertake various permissible forms of business.
The draft guidelines highlighted that there should be no overlap in lending businesses between a bank and its group entities. These changes could have an impact on the structure or functioning of the lending businesses of bank groups.
In its recent note, CRISIL said the Reserve Bank of India’s (RBI) draft guidelines will, if implemented in toto, necessitate reorganisation of the lending business of bank groups.
It highlighted that the impact of such reorganisation, however, will likely be less than 6% of the consolidated advances of individual banks, a study by CRISIL Ratings covering 32 public and private sector banks that comprise ~95% of the total advances of the Indian banking system indicates.
What was the RBI guidelines?
Earlier this month, the RBI issued draft guidelines stating that banks and their subsidiaries or group companies cannot engage in the same activities.
There should be no overlap in lending businesses between a bank and its group entities, it said.
The draft guidelines suggest two key changes that could have an impact on the structure or functioning of the lending businesses of bank groups.
First, only a single entity within a bank group can undertake a particular form of permissible business, and multiple entities shall not undertake the same business or hold/acquire the same category of licence, authorisation or registration from any financial sector regulator3 .
Second, there can be no overlap in the lending activities undertaken by the bank and its group entities.
CRISIL highlights 3 key takeaways:
Firstly, of the 32 banks, 20 banks comprising ~40% of banking sector advances will not be impacted by these guidelines, either because they have no operational group non-banking financial company (NBFC) or housing finance company (HFC), or because these group entities are carrying out lending businesses that are not undertaken in the bank and are explicitly listed as permitted to be carried out in a separate entity.
Secondly, of the remaining 12 banks, accounting for ~55% of sector advances, 9 have NBFC or HFC subsidiaries, while the rest hold stake only in associate entities.
The proposed guidelines do not distinguish between the two categories.
Thirdly, for these 12 banks, the share of impacted assets under management (AUM) is limited to less than 6% of the individual bank’s consolidated AUM in most cases, which is not large.
