Banking group NBFCs:  Need to map businesses to avoid overlaps with the parent banks

– Vinod Kothari | finserv@vinodkothari.com

The new dispensation implemented from 5th December 2025 implies that lending business, obviously carried in the parent bank, needs to be allocated between the bank and the group entities so as to avoid overlaps. The bank will have to take its business allocation plan, at a group level, to its board, by 31st March 2026.

The RBI’s present move has certain global precedents. Singapore passed an anti-commingling rule applicable to banking groups way back in 2004, but has subsequently relaxed the rule by a provision referred to as section 23G of the Banking Regulations. However, the approach is not uniformly shared across jurisdictions.

We are of the view that as the decision works both at the bank as well as the NBFC/HFC level, the same has to be taken to the boards of the respective NBFCs/HFCs too.

Businesses which currently overlap include the following:

1. Loans against properties
2. Housing finance
3. Loans against shares
4. Trade finance
5. Personal loans
6. Digital lending
7. Small business loans
8. Gold loans
9. Loans against vehicles  – passenger and commercial, or loans against construction equipment

In our view, banks will have serious concerns in meeting their priority sector lending targets, unless they decide to keep priority sector lending business in the bank’s books. Priority sector lending is quite often much less profitable, and the NBFCs in the group are able to create such loans at much higher rates of return due to their delivery strengths or customer franchise. As to how the banks will be able to originate such loans departmentally, will remain a big question.

There are other implications of the above restrictions too:

1. If a bank is engaged, for example, in MSME lending, but auto loans are done at the group entity, the bank cannot be a co-lender with its group entity, nor can it acquire auto loans originated by its group entity.
2. Extending the same argument, if the banking group is carrying auto loan activity in its group NBFC, it cannot buy auto loans either by way of a direct assignment or co-lending, originated by other banks or other independent NBFCs. The reason for this is obvious – if the bank has decided to carry auto lending activity in its group entity, it should stay away from that exposure, even if originated by other entities.
3. The decision to keep particular loan products with group entities – can it be stretched to the extent that bank will not have indirect exposure in such products, for example, by way of giving a loan to its group entity for on-lending for a product which the bank does not undertake departmentally? One of the reasons that may have prompted the Mohanty Group report in 2020 to segregate products between the bank and its group entities was contagion risk. If contagion is at the core of the present restriction, then that risk is still there even if the bank lends to a group entity for on-lending for a product. However, in our view, the present restriction is primarily aimed at avoiding regulatory arbitrages, and cannot be expected to require a completely independent financing of the loan products that a subsidiary finances, and not the bank.
4. Therefore, in our view, a bank may not only on-lend to its group entities (of course, on the basis of an arm’s length lending approach), but it may also buy the asset-backed securities arising from such loan portfolios as sit with its group entities.

Factors to decide loan product allocation

In case of several non-lending products such as securities trading, demat services, etc., the approach may be easier. However, lending services constitute the bulk of any bank’s financial business, and group NBFCs and HFCs are also evidently engaged in lending. Hence, there may be a delicate decisioning by each of the boards on who does what. Note that this choice is not spasmodic – it is a strategic decision that will bind the entities for several years.

The factors based on which banks will have to decide on their business allocation may include:

1. Delivery mechanisms – Mostly, branch and team strengths are sitting in group entities. Therefore, the loan products that entail last mile customer outreach, geographical access, etc are naturally housed in entities which possess those abilities.
2. Technology strength: Some of the products are based on fintech or similar technology strength, which may be sitting with respective entities.
3. Recovery mechanisms – Group entities are typically more nimble than banks. Hence, while banks may keep loans on their books, but they may engage group entities for recovery purposes.
4. Priority sector requirements-:  This will be a very important factor in deciding business allocation. Banks are mandated to invest 40% of their ANBC in qualifying priority sector loans – not NBFCs. Hence, for such loans as qualify as priority sector, the option may be to house the portfolios with the bank, or to invest in pass through certificates.

Securitised notes: whether investment in group entities?

Talking about pass through certificates, there is a complicated question as to whether the investment limits imposed by the 5th Dec. 2025 amendment on aggregate investments in group entities will include investment in pass through certificates arising out of pools originated by group entities. In our view, the answer is in the negative, as the investment is not originator, but in the asset pools. However, if the bank makes investment in the equity tranche or credit enhancing unrated tranches, the view may be different.

Conclusion

Banks are heading shortly in the last quarter of a year which is laden with strong headwinds. In this scenario, facing business allocation decisions, rather than business expansion or risk management, may be more challenging than it may seem to the regulators.

Other resources:

• Banks’ exposure to AIFs: Group-wide limits introduced
• Bank group NBFCs fall in Upper Layer without RBI identification
• Group-level regulation: RBI brings major regulatory restrictions on banks and group entities
• New NBFC Regulations: A ready reckoner guide
• New Commercial Bank Regulations: A ready reckoner guide