In a bid to create a level playing field for existing banks and new players that may enter the sector, the Reserve Bank of India (RBI) has mandated strict intra-group exposure norms that will take effect from October.
Almost all existing commercial banks, including foreign banks operating in India, will have to adhere to these norms. The new regulations have brought entities belonging to a common brand name, an associate or a joint venture and non-operative financial holding companies (NOFHC) under the definition of a group entity.
Banks cannot lend more than 5% of their paid-up capital and reserves to a single non-financial company or unregulated financial company belonging to the same group. Also, they
The aggregate group exposure of the bank must not exceed 20%, the RBI has mandated. It also wants banks to disclose intra-group exposure details with their financial statements.
Exposure through equity and other capital instruments are exempted from this norm as also are interbank exposures, the RBI said.
Any bank that is under the NOFHC structure cannot lend or invest in any instrument of the NOFHC and promoter group entities.
“These measures are aimed at ensuring that banks, at all times, maintain arm’s length relationship in dealings with their own-group entities, meet minimum requirements with respect to group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures,” the central bank said.
Further, the central bank said that banks must not enter into cross-default clauses (Cross default clauses are triggered automatically when a lender declares that a loan is in default. Such clauses mean that other loans and borrowing instruments made to the borrower by the lender, and by other lenders, are also in default).
Banks must also not sell their bad loans to group entities other than asset reconstruction companies, the RBI said. “Banks must also ensure that the transactions in low-quality assets with group entities, whether regulated or unregulated, are not done for the purpose of hiding losses or window dressing of balance sheets,” the central bank said. They must adhere to extreme caution and be transparent while distributing or cross selling products of group entities.