The Business Bytes
New Delhi, October 25, 2024 (TBB Bureau): The Reserve Bank of India (RBI) recently released draft guidelines aimed at reshaping the regulatory framework governing the lending activities of banks and their group entities. If implemented in their entirety, these guidelines could prompt a significant reorganization within bank groups, compelling a single entity to oversee each permissible line of business. Despite the sweeping nature of these proposed changes, the potential impact appears limited, with affected assets under management (AUM) projected to remain below 6% for most individual banks, according to a CRISIL Ratings study.
Covering 32 public and private sector banks that account for roughly 95% of total advances in India’s banking sector, CRISIL’s study sheds light on the potential impact of the guidelines and provides insight into how bank groups may need to realign their lending structures.
The draft guidelines introduce two primary requirements that could alter the way bank groups structure their lending operations. Firstly, only one entity within a bank group would be permitted to engage in a specific form of permissible business. This means that multiple entities within the group cannot simultaneously hold the same category of license, authorization, or registration for any regulated financial activity. Secondly, there must be no overlap in lending activities conducted by the bank and its associated entities. Should the draft be enacted, banks would have a two-year window from the issuance of the final circular to align with these requirements.
Out of the 32 banks studied, 20 banks — representing 40% of the sector’s total advances — are unlikely to be impacted by the guidelines. This is due to either the absence of a group non-banking financial company (NBFC) or housing finance company (HFC) or the fact that these group entities operate in lending sectors that are not handled by the bank itself, in line with permitted practices for separate entities.
For the remaining 12 banks, which account for 55% of sector advances, nine possess NBFC or HFC subsidiaries, while the others hold only associate stakes. Importantly, the draft guidelines do not distinguish between subsidiary and associate entities. For these banks, the potential reorganization impact is limited to less than 6% of their consolidated AUM in most cases.
According to Ajit Velonie, Senior Director of CRISIL Ratings, the need for reorganization primarily arises for bank groups with lending entities in the NBFC-Investment and Credit Company (ICC) category. In instances where the bank and its group NBFC or HFC cater to similar asset classes, even when targeting different customer segments, a choice may need to be made regarding which entity will take on the lending business.
CRISIL Ratings emphasizes that this circular remains in draft form, and the actual scope of restructuring will ultimately depend on the details of the final circular. An essential consideration is whether group NBFCs will be allowed to operate mutually exclusive lending businesses distinct from the bank’s activities but not explicitly authorized as separate.
The draft guidelines stipulate that no group entity should engage in a business not allowed within the bank itself. CRISIL’s analysis shows that the NBFC and HFC subsidiaries of banks are already largely compliant with this standard. However, if any associate entity currently undertakes activities prohibited in banks, it may be required to cease those operations.
According to Subha Sri Narayanan, Director of CRISIL Ratings, bank groups with NBFC or HFC subsidiaries have been able to reach varied customer segments more efficiently. For these banks, managing the transition in a seamless, operationally efficient manner will be crucial. “While there could be some temporary impact due to the operational integration, CRISIL Ratings does not anticipate any material impact on the credit profiles of the banks,” Narayanan explained. However, ensuring that the reorganization of NBFC and HFC subsidiaries proceeds smoothly will be essential to minimize disruptions during the transformation.
As India’s banking sector braces for potential reorganization, the focus will likely remain on minimizing the operational impact while maintaining credit stability across bank groups.
