Banks Ask For More Time To Comply with RBI's Overlapping Lending Rules

Banks in India have appealed to the Reserve Bank of India to extend the deadline for the implementation of new rules designed to eradicate overlapping lending activities within a bank group. The draft guidelines, issued in October, suggest that a particular form of permissible business can be carried out only by a single entity within a bank group. While the present timeline permits two years for compliance, banks, through the Indian Banks' Association (IBA), have requested an extension, with some seeking up to five years.

The rules form part of the consultation draft circular titled Forms of Business and Prudential Regulations for Investments, aimed at simplifying group-wide banking business operations. It prevents banks and their subsidiaries from running the same type of lending or having the same sort of license issued by financial regulators, which means that banks and the NBFC subsidiaries cannot follow the same kind of lending activities. 

Only one entity in a banking group (the bank and its group entities) will engage in a particular form of permissible business. The draft circular said, "Multiple entities within a bank group shall not undertake the same business or hold/acquire the same category of licence/authorisation or registration from any financial sector regulator". 

The proposed norms, whose implementation is scheduled to commence two years from the publishing of the final guidelines will affect major banks that hold subsidiaries involved in the same type of lending. HDFC Bank offers HDB Financial Services. ICICI Bank offers the services of ICICI Home Finance, and Axis Bank has Axis Finance. Kotak Mahindra Bank and Federal Bank have subsidiaries that fall on the same line.

In a recent IBA-organised meeting, bank officials mentioned the issues that these new guidelines will bring along. According to them, subsidiaries would play an important role in serving the desired business goals, such as underdeveloped rural markets. Significant restructuring and realignment of operations would have to take place in the bank groups with this new set of guidelines, thereby affecting outreach and efficiency.

Additionally, the draft norms require banks to approach the RBI’s Department of Regulation for approval to undertake any new activity through group entities, except for those already permitted. This could further slow down expansion plans and operational flexibility.

As the banking sector awaits the final circular, the request for an extended compliance window underscores the complexities of aligning group structures with the RBI’s vision of streamlined operations. Bankers believe a longer timeline would provide adequate room for smooth adaptation to the new framework.