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The Reserve Bank of India (RBI) intends to change the regulatory framework governing non-banking activities carried out by banks and their group entities such as insurance and asset management, reported the Financial Express, citing sources. According to the central bank, the moveis aimed at eliminating any regulatory arbitrage inherent in the current system.
The modifications could be made by amending the Banking Regulation Act.
According to sources, an internal panel has been set up by the RBI for this purpose. The panel has recommended a clearer and more explicit segregation of core and non-core businesses of banks and group entities.
“The banking regulation department (of the RBI) has conveyed to banks its decision to review the framework, and asked them to submit their inputs,” one of the sources told FE.
Senior executives from major banks, including State Bank of India, Punjab National Bank, HDFC Bank, ICICI Bank, Axis Bank, Bank of Baroda, and Canara Bank, whose group firms are involved in non-banking operations, met last month to discuss the matter. Following internal deliberations, the banks are likely to offer their opinions via the Indian Banks’ Association.
The regulatory revamp may also address concerns like the necessity for increased standardisation of practises for banks and non-banking financial institutions, as well as the consolidation of group entities of banks that engage in non-banking operations. It could also focus on any incompatibility between a company’s primary and non-core activities.
Any regulatory change will be significant because all big banks and the firms that make up their group are currently engaged in non-core activities and will need to adjust their business plans to comply with the new regulations, according to a senior banker.
The proposed action is the latest in a line of initiatives by the central bank to strengthen the framework of regulations governing financial institutions to follow the evolving needs of the times. It has released updated regulatory frameworks for NBFCs, payment banks, and cooperatives in recent years. In a similar vein, it released recommendations for all lenders in September to safeguard against misuse of the data of borrowers using digital lending applications.
Since the bad loan crisis erupted, the government has also urged state-run banks to review their non-core activities and eliminate them when practical.
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