Internal Competition or Overlap: Not on for Indian Banking?

Internal Competition or Overlap: Not on for Indian Banking?

Brief Overview:

RBI wants elimination of overlapping business and lending activities by the banking sector. It has proposed sweeping changes to the way in which banking groups can and do carry on business. This is by way of a Draft Circular – Forms of Business and Prudential Regulation for Investments (the “Draft Circular”). This seeks to amend ‘forms of business’ and ‘prudential regulation for investments’ as provided under Master Direction- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016 dated 26th May 2016 (the “Master Direction”).

Technical Details:

The Draft Circular proposes the below key amendments to the forms and manner of business that banks can undertake:

1)  Banks to obtain prior approval from the RBI for any new activities through group entities that are not already permitted.

2) Group entities should adhere to regulations applicable to parent banks and must not be used to circumvent them.

3) Banks are directed to ensure the elimination of overlapping business licenses and lending activities within a bank group.

4) No bank shall engage in any activity other than those listed under paragraphs 9, 10, 11, 12, 14(c), 18, 19, 20, and 21 in Chapter – III of the Master Direction without the prior approval of RBI (including the branches operating in IFSC, GIFT City).

5) Overseas branches of Indian banks must adhere to the more stringent of the host or home country regulations and cannot engage in activities prohibited by the parent bank unless permitted by RBI.

6) Non-Operative Financial Holding Companies (NOFHC) will not be able to set up new entities for three years after commencing business.

7) Core activities of the banks to be performed departmentally.

The other key amendments proposed to the prudential regulation are:

1) Banks will be restricted from holding, directly or indirectly through a trustee company or otherwise (other than those specifically permitted), whether as pledgee, mortgagee, or absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less.

2) The earlier equity investment limit which was only for subsidiaries or a financial service company not being a subsidiary is now expanded to apply to all companies including its group companies. Further, aggregate equity investment limits are also proposed.

3) Investments in Category III AIFs will not be allowed. Furter, any investment in Category I and II AIFs will be subject to new limits and conditions.

4) Prior approval from the RBI will be required for investments of 20% or more in the equity capital of any financial or non-financial services company, either individually or collectively by the bank group. However, prior approval shall not be required for acquisition through restructuring of debt.

5) Investments below 20% will not require prior approval if certain financial conditions are met (e.g., CRAR, net profit).

6) Banks will be restricted from holding more than 30% of the equity capital of an investee company collectively with their group entities.

Key Takeaways:

The strict regulatory framework proposed may limit banks’ ability to adapt quickly to market changes potentially stifling new business opportunities. Also, by allowing only one entity within a bank group to undertake specific businesses, the framework may stymie innovation and even competition.

Overall, while the regulatory framework aims to ensure risk management, regulatory compliance, and operational clarity, its rigors may hinder innovation, competition, and operational efficiency within the banking sector.

For further details, please see:

https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4529

https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58823

For any queries / clarifications, please feel free to ping us and we will be happy to chat:

Juris Corp Jayesh H & Rupul Jhanjee

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