Relationship between banks and NBFCs set to change
Banks cannot have more than 10% stake in NBFCs
Based on the recommendations of the Internal Group and taking into consideration the feedback received thereon, RBI has decided on 3rd Nov 2006, to put in place a revised framework to address the issues pertaining to the relationship between banks and NBFCs. The revised framework will not be applicable to the Residuary Non Banking Companies (RNBCs), which are governed by a separate set of regulations.
Bank Exposures to NBFCs
The exposure (both lending and investment, including off balance sheet exposures) of a bank to a single NBFC should not exceed 5% of the bank’s net worth as per its last published balance sheet. Further, the aggregate exposure of a bank to all NBFCs should not exceed 40% of the bank’s net worth, as computed above.
Regulatory Framework for NBFCs Forming Part of a Banking Group
Henceforth, initially, wholly owned and majority owned NBFCs promoted by the parent / group of a foreign bank having presence in India, would be treated as part of that foreign bank’s operations in India and brought under the ambit of consolidated supervision. Consequently, the concerned foreign banks should submit the consolidated prudential returns (CPR) prescribed by the above guidelines to the Department of Banking Supervision and also comply with the prudential regulations / norms prescribed therein to the consolidated operations of that bank in India.
For example Citibank will now be required to include financials of its NBFC arm, Citifinancials, in the consolidated prudential returns.
NBFCs which do not belong to any banking group are currently permitted to offer discretionary portfolio management as a product, as permitted by their respective regulators. Henceforth, bank sponsored NBFCs will also be allowed to offer discretionary PMS to their clients, on a case to case basis.
Ownership and Governance
Banks in India, including foreign banks operating in India, shall not hold more than 10 % of the paid up equity capital of an NBFC – D. This restriction would, however, not apply to investment in housing finance companies.
Banks which at present exceed the above limits should approach the Reserve Bank, within a period of two months from the date of this circular, supported by a plan for complying with the proposed regulatory requirement within a specified time frame.
For example now DBS Bank will be required to reduce its stake in Cholamandalam DBS Finance. DBS can approach the RBI within two months with a concrete plan to bring down its stake in the south-based NBFC within a specified timeframe.
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