The Reserve Bank of India (RBI) has removed the proposed bar on the overlap in the businesses undertaken by a bank and its group entities, discarding a major obstacle for big banks that own shadow lenders operating in similar lines of business.
“The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entity(ies) is being removed from the final guidelines. The strategic allocation of business streams among group entities will be left to the wisdom of bank boards,” the RBI said.
The banking regulator had issued a draft circular in October, proposing restriction on overlap in lending activities undertaken by the bank and its group entities. It said a single entity within a bank group should undertake a particular form of permissible business.
Relief for major private lenders
Analysts believe HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Federal Bank will benefit from the RBI decision. These banks have subsidiaries operating as non-bank lenders which carry out similar business like their parents. Axis Bank has a subsidiary named Axis Finance, while Kotak Mahindra Bank has Kotak Mahindra Prime and Kotak Mahindra Investments. ICICI Bank owns ICICI Home Finance and Federal Bank has a non-bank subsidiary, Fedbank Financial Services.
“The announcement to remove the proposed bar is a forward-looking move. The moment RBI gives the permission to do a business in subsidiary, it means either the regulator wants the reach of that business to be different or to promote more financial inclusion, which large banks cannot manage with their resources,” said a banker.
With the revised guidelines in place, banks get a clarity, said Saurabh Bhalerao, associate director and head of BFSI research at CareEdge. “To comply with the proposed norms, banks would have had to realign their structures. While the final norms are awaited, the removal of the bar on overlap of business provides clarity. They can now focus more on growth, rather than restructuring the subsidiary.”
Clarity paves way for growth focus
Along with this, the RBI on Wednesday other reforms, which led to a rally in bank stocks. The Nifty Bank rose 1.3% to 55,347.95, majorly contributed by large private banks.
According to Anand Dama, head of BFSI research at Emkay Global Financial Services, most measures are seen to be credit positive and two-three key measures are seen directly benefiting large banks such as HDFC Bank and ICICI Bank.