Summary of this article
RBI directions separate core and non-core financial activities clearly.
Rules apply uniformly across banks and NBFCs.
Consumers benefit from clearer, safer service structures.
The Reserve Bank of India (RBI) has issued five amendment directions that apply to commercial banks, small finance banks, payments banks, non-banking financial companies (NBFCs), and non-operative financial holding companies (NOFHCs).
These directions revise how these regulated entities may undertake financial services and how they must keep core activities separate from other services that involve different types of risk. These amendments follow a review of earlier rules and feedback received on a draft circular that examined the ring-fencing of core business from non-core financial services. The revised directions provide the final framework on how institutions may organise and engage in financial activities.
Commercial Banks Amendment Direction
The amendment to the direction for commercial banks explains which financial services should be conducted within the bank itself, and which should be housed within a separate group entity.
This direction reinforces the distinction between core functions, like deposits, loans, and bill payments, and other financial services that may involve risk-sharing or non-core activities. For consumers, this means that essential services remain within the bank's main operations and are not affected by unrelated business areas.
Small Finance Banks Amendment Direction
The direction for small finance banks follows similar principles but takes into account that these banks have a specific objective to serve underserved and small borrowers.
Under the revised framework, these are required to keep their core activities separate from any additional financial services. This separation helps maintain consistency in how the small finance banks organise their business around customers who rely on basic credit and deposit services.
Payment Banks Amendment Direction
The payments banks are permitted to provide a limited range of services, principally deposit-taking up to a specified limit and facilitating payment transactions. The amendment direction reinforces these boundaries and prescribes the manner in which they could participate in other financial services through permissible arrangements. This retains the focus on ensuring that consumers can enjoy safe, transaction-oriented services from payments banks, without their expanding into areas outside the defined scope.
NBFCs Amendment Direction
The amendment direction for non-banking financial companies (NBFCs) updates how the entities may participate in financial services when they are part of a larger group which includes a bank. If an NBFC, along with any bank in the same group, undertakes similar activities, the NBFC should align with the updated framework.
This makes sure that the financial services within the group are undertaken consistently. As for customers, it reduces overlapping and clearly indicates which entity is responsible for which service.
NOFHCs Amendment Direction
Direction for NOFHCs (non-operative financial holding companies) prescribes the manner in which these companies should organise and supervise the group companies undertaking financial services activities. The revised structure also ensures that activities within the group remain well-demarcated.
Impact On Consumers
The key result for customers in all five directions is a sharper distinction between core banking services and other financial activities conducted by institutions. This makes it less likely that activities outside of regular banking interfere with services such as deposits, loans, and bill payments that are considered essential. The revised framework also spells out more clearly which services fall directly within the mandate of each type of institution and which need to be handled separately.
The directions aim to create a more transparent and predictable environment for customers who use services from different types of regulated institutions by setting consistent rules across multiple types of regulated entities. The structure also aims to ensure that consumer-facing functions are stable and well-defined while keeping other activities within appropriate bounds.
