RBI drops proposed restriction on bank-NBFC overlap

In a relief to banks, the Reserve Bank of India has withdrawn its proposal to stop entities within a bank group from undertaking similar business activities.

Now, banks and their non-bank financial companies can operate in a similar line of business without banks having to merge or divest their stakes in their subsidiary.

“The proposed regulatory restriction on overlap in the businesses undertaken by a bank and its group entities is being removed from the final guidelines,” RBI governor Sanjay Malhotra said following the monetary policy committee’s (MPC) meeting on Wednesday.

“The strategic allocation of business streams among group entities will be left to the wisdom of bank boards,” he added.

The relaxation is expected to be positive for private banks such as HDFC Bank, Axis Bank, and ICICI Bank that have NBFC subsidiaries. HDFC Bank owns HDB Financial Services, ICICI Bank owns ICICI Home Finance Co., and Axis Bank owns Axis Finance.

Shares of HDFC Bank ended Wednesday’s trading up 1.5% on the National Stock Exchange, while ICICI Bank rose 1.8% and Axis Bank gained 2.3%. Nifty Bank ended the day 1.25% higher, while the benchmark Nifty 50 rose 0.88%.

Different strokes

If RBI’s proposal had become regulation, banks would have been forced to merge their NBFCs operating in a similar line of business or sell their stake in such subsidiaries. This would have posed stiff challenges, especially in rural and niche areas where NBFCs enjoy more flexibility and lighter regulation than banks, said Vijay Singh Gour, research analyst at Mirae Asset Sharekhan.

“Unlike banks, NBFCs can expand the business at lower costs without the heavy compliance and approvals that banks face. Now, with the relaxation, NBFCs can operate as separate entities with board level policy. Also, banks and NBFCs can focus on their growth,” Gaur added.

Anil Gupta, senior vice president and co-group head at rating agency Icra Ltd, pointed out that various subsidiaries of banks have overlapping businesses as they cater to different profiles of customer segments through banks and subsidiaries.

Certain product segments like used cars, affordable home loans, and gold loans may also require different employee skillsets and branch networks, requiring banks to operate through the NBFC subsidiary model, he added.

The central bank issued a draft paper in October 2024 stating that “only a single entity within a bank group shall undertake a particular form of permissible business”.

“Multiple entities within a bank group shall not undertake the same business or hold/acquire the same category of license or authorisation or registration from any financial sector regulator. Further, there shall be no overlap in the lending activities undertaken by the bank and its group entities,” it stated.