Group-level regulation: RBI brings major regulatory restrictions on banks and group entities

– Team Vinod Kothari Consultants, finserv@vinodkothari.com

Basis a proposal made vide proposed regulation circulated on 4th October, 2024, (“Draft Proposal”), the RBI has released Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) (Amendment) Directions, 2025, which put several significant restrictions on group entities of commercial banks, eventually leading to a group-wide regulation.

Veteran bankers are not surprised by the RBI’s move, though, with proposed introduction of expected losses, related party transactions and a lot more in the offing, this seems too much over too short a time.

In fact, when the non-operating financial holding company (NOFHC) model was recommended in 2013 by the Parliamentary Standing Committee on Finance, it was laid there that “(T)he general principle is that no financial services entity held by the NOFHC would be allowed to engage in any activity that a bank is permitted to undertake departmentally”. The idea of ring fencing of diverse activities was inspired by the need for controlling contagion, alleviation of regulatory arbitrage, etc. The RBI’s Internal Committee named P K Mohanty Working Group in 2020 also made similar recommendations.

The amendments are clearly aimed at curbing any possibility of regulatory arbitrage, which are currently observed. Loans against shares or acquisition finance (for which RBI’s proposals at bank level are still in draft stage), currently restricted for banks, are routed through group entities. Banks cannot fund land acquisition – the practice of general purpose corporate loans or privately placed debentures for construction companies is quite common. The extent of shareholding in entities is limited by the Banking Regulation Act, but not for group entities; therefore, private equity holdings are also funded through group companies. Most of the banking groups in the country have NBFCs and HFCs, as also several entities which have entangled operational and referral business with their parent banks.

The overall result is a complex network of activities with business and operational dependencies. A lot of rethink will be forced at group strategy level pursuant to the Directions, which, of course, were on the anvil for over 2 years now.

Applicability timeline:

• The Amendments take effect immediately, that is, 5th December, 2025.
• However, for the restrictions in para 18, no new business shall be carried in the affected segment (overlapped banking products) on or after 1st April, 2026. Para 18 essentially deals with the exclusivity principle – that unless rationally explained through a board policy, no business which is carried by the bank departmentally shall be carried in any group entity, and the restrictions on lending against shares, lending against land, etc. Therefore, for para 18 restrictions, the adherence timeline is 31st March, 2026.
• For the rest of the restrictions, in para 22-29A, and para 38A-38E, the bank shall provide an implementation plan by 31st March, 2026, to implement the changes by 31st March, 2028. Hence, there is a 2 year timeline only for these changes.
  • Para 23-29A relates to investment restrictions. Hence, the proper interpretation shall be that no new fresh investment shall be made on or after 5th December 2025, if the said investment is in breach of the norms, and for excess of investments held already, the banking group shall provide plans by 31st March 2026 for disposal within maximum 2 years thereafter.
  • Paras 38A to 38E relate to AIF, REIT and InvIT investments, which is now applicable group-wide. In particular, a banking group cannot make investments in Cat III AIFs (mostly seen as hedge funds). For these investment restrictions, there may be existing investments in excess of the limits. , The interpretation should be – no fresh investment, if violative of the restrictions, can be made on or after 5th December, but curative action may be taken for any excesses as per a business plan to be submitted by 31st March, 2026.

Meaning of “group entities”

Group entities have been defined to mean subsidiaries, joint ventures and associates. For each of these terms, the meaning as per Accounting Standards shall be applied. An interesting  question may be – which accounting standard, as banks are currently operating under IGAAP, whereas most of the subsidiaries and associates have adopted Ind AS. As the meaning of the term is viewed from the parent entity perspective, it will be proper to apply the IGAAP definition, as applicable in case of the banking entity.

Unlike what may appear, the “group entity” need not be NBFC – that is to say, the group entity restrictions apply to all entities forming part of the banking group, and there are some specific restrictions that apply to NBFCs in the group.

Major restrictions

The major restrictions may be grouped into 3 broad heads:

• Restrictions on business overlaps, regulatory arbitrage
• Investment limits, including limits on group-wide investments in investee companies
• Restrictions in investments in AIFs, REITs and InvITs
• Group-wide capital and risk management.
• Group-wide restrictions on agency services for third party products

No more business overlaps

The following are the major amendments:

1. Certain activities can be carried only by a group entity, and not by banks departmentally:  Activities listed under Para 18(5) of the Directions, viz., mutual fund business, insurance business, pension fund management, investment advisory services, portfolio management services and broking services, can be carried out only through a group entity, and not by banks departmentally. Out of the aforesaid list, mutual fund business and Insurance business with risk participation, pension fund management investment advisory services, portfolio management service, broking services for commodity derivatives segment were there in the 2016 Directions as well, later consolidated under Chapter IV of the Directions. While the Draft proposals also referred to “risk sharing activities that require ring-fencing”, the same has been omitted in the Amendment Directions.
   • Additionally, for PMS or similar scheme offered through the group entity, prior approval of RBI is required [Para 65 of the Directions]. Broking services in commodity segment can be provided through a separate subsidiary, subject to compliance with conditions such as, the subsidiary putting risk control measures in place with board approval, ensure strict compliance with requirements specified by SEBI and/ or commodity exchanges, and prohibition on undertaking proprietary positions in commodity markets [Para 67 of the Directions].                                                                                                      

2. One entity, one business principle: Para 18 (3) states: “As a principle, any form of business shall be undertaken by one entity in a bank group. However, if a bank undertakes a form of business through more than one entity in a bank group, the same shall be done with proper rationale such as business segmentation/specialization, duly recorded and approved by the Board of the bank.” Notably, this principle was stated by the 2013 Parliamentary Committee report too. This may have the following implications:
   1. The business which is done by the bank may also be done at group entities, or vice versa (except businesses which cannot be done departmentally), but only on the strength of a specific Board approval. The Board approval may also give the rationale. Segmentation or specialisation may be one such rationale. For example, housing finance is carried at subsidiary level, the rationale may be that such funding is a specialised activity. However, that would mean the same business cannot be done at the bank.
   2. Given the 31st March, 2026 timeline, this board decision has to be passed before that date. Banks must be ready with a full mapping of the overlaps in their business, and have a board resolution with a full plan of allocation of activities across entities, trying to either rationalise the overlaps or to eliminate the same.
   3. For whatever business is to be undertaken at the bank level, there would need to be a risk identification, risk mitigation and capital allocation.
   4. Questions will continue to be raised as to whether a bank can be a co-lender with its group entities – the answer seems to be in the negative. Similarly, given the fact that there is a stress on entity-level grouping, it does not seem proper for a bank to acquire, after 1st April, 2026,  the loans originated by its subsidiaries by transfer of loan exposures. Investment in securitisation notes, for business written by the subsidiaries, does not result into any overlap.

Lending and investment restrictions

3. Lending through group NBFCs: Where bank group NBFCs are engaged in lending, the following regulations/restrictions shall apply:
   1. Upper layer: All bank group NBFCs/HFCs shall be treated as Upper Layer (UL) NBFCs. UL entities are subjected to additional regulations, such as maintenance of CET-1 capital, differential standard asset provisioning, large exposure framework, additional disclosures, etc.  However, the mandatory listing requirement within 3 years will be applicable only in case the NBFC has been identified as UL by the RBI.
   2. Loans against parent bank’s shares: Group NBFCs shall not lend against the security of the shares of the parent bank [Para 13 of RBI (Commercial Banks – Credit Risk Management) Directions, 2025].
   3. Loans to directors/relatives: Group NBFCs shall not grant any loan, renew any loan, or grant additional loans/limits for loans against parent bank’s shares, or parent bank’s directors or directors’ relatives. In our view, this restriction should be seen as applicable with immediate effect, that is, 5th December, 2025.
   4. Loans against promoters’ contribution: Conditions w.r.t. financing promoters’ contribution towards equity capital apply in terms of Para 166 of RBI (Commercial Banks – Credit Facilities) Directions, 2025. Such financing is permitted only to meet promoters’ contribution requirements in anticipation of raising resources, in accordance with the board-approved policy and treated as the bank’s investment in shares, thus, subject to the aggregate Capital Market Exposure (CME) of 40% of the bank’s net worth. 
   5. Loans for financing land acquisition: Group NBFCs shall not grant loans to private builders for acquisition and development of land. Further, in case of public agencies as borrowers, such loans can be sanctioned only by way of term loans, and the project shall be completed within a maximum of 3 years. Valuation of such land for collateral purpose shall be done at current market value only.  
   6. Loan against securities, IPO and ESOP financing: Chapter XIII of the RBI (Commercial Banks – Credit Facilities) Directions, 2025 prescribes limits on the loans against financial assets, including for IPO and ESOP financing. Such restrictions shall also apply to Group NBFCs. The limits are proposed to be amended vide the Draft Reserve Bank of India (Commercial Banks – Capital Market Exposure) Directions, 2025. See our article on the same here.
4. Investment restrictions in investee company’s equity capital

Investor	Investee	Limits
Bank	Any entity, including its group entity	10% of bank’s paid-up capital and reserves as per last balance sheet/ latest quarter, whichever is lower
Bank	All entities, including group entities and overseas investments	20% of bank’s paid-up capital and reserves as per last balance sheet/ latest quarter, whichever is lower
Bank group	Any entity	<20% of the investee’s capital Investments of 20% or more require prior approval of RBI Exceptions: (i) Shares held for trade (HFT category) are not included. (ii) Shares held by mutual funds under management of the AMCs are not included; however, if the investments are made by the AMCs out of their own funds, the same are included.
Bank	Any entity	<30% of the investee’s capital, if the capital is acquired pursuant to debt restructuring or protection of bank’s interest (say on invocation of a pledge)
Bank	In Bank’s subsidiary	Permitted, if the subsidiary is carrying business of banking as specified in sec. 19 (1) of the Act
Bank	In an associate company	Upto 30% of the equity of the investee may be held by the bank, if the investee is carrying a non-financial business permitted in terms of sec. 6 (1) of the Act

5. Bar on investment in Category III, and group-wide limits on Cat I and II AIFs

Banks shall not invest in Cat III AIFs. In case of a bank’s group entities, if the entity is a sponsor of an AIF, it can only hold the minimum investment required as a sponsor. Further, in addition to the bank’s limits on making investments in AIFs (see an article here), limits on investments by bank groups, on aggregate basis have also been introduced. Thus, investment of a bank group in AIF is governed by the following limits:

• Less than 20% in the corpus of Category I and Category II – without prior approval of RBI, however, subject to the Parent bank maintaining the minimum CRAR post-investment and having reported net profit in each of the last two financial years.
• 20% – 30% in the corpus of Category I and Category II – with prior approval of RBI

Similarly, limits have been laid down for bank’s investment in the units of REITs and InVITs upto 10% in the unit capital of such REITs/ InVITs. 

Agency business or referral services by bank group

Pursuant to the present Amendments, the Directions define “agency business” as:

• An arrangement under which a bank or its group entity act as an agent
• For a third party product or service provider (TPPSP)
• without risk participation
• to facilitate the sale of the latter’s financial products or services (e.g., insurance, mutual fund, pension fund, etc.)
  • Only regulated financial products or services
• to its own customers
• Activities may inter-alia include marketing, sales, promotion, initial point of contact for redressal of grievance and other after-sale services related to the product or service.

The notable change here seems that the bar on agency business is now extended to group entities. That is to say, bank or bank group entities may act as TPPSPs only for regulated financial products.

Further, neither the bank’s name nor the integration with the bank’s core IT platform will be used for third party products. This is to ensure that there is no reputational or operational risk flowing to the bank for third party products. Nor can the bank’s premises be used for marketing any third party products.

Therefore, as for referral services, the bank may act as referral provider only for financial products.

As regards bank acting as “agent”, the same is specifically covered by para 4(1) read with para 58 to 61 of the Directions. As for the meaning of referral versus agency, and the fine distinction between the same, see our article.

The conditions for agency business prescribed thereunder include: 

• Permission for agency business for only such products and services as permitted to be dealt by bank as per the BR Act.
• Service to be provided on fee basis without any risk participation
• Additional conditions for departmentally undertaking mutual fund agency business or corporate agent business

Group-wide capital and risk management policy

A small business significant provision sits in para 38F, which requires banks to have a group-wide capital and risk management policy.

Group-wide capital management implies the computation of regulatory capital as also ICAAP at a group level. Regulatory capital itself may not be applicable to some of the group entities (for example, non-NBFCs); but a consolidated view should be taken to see the adequacy of economic capital at the group level.

Similarly, risk management, including identification of financial and non-financial risks, in particular, operational risks, should be done at group level.

As this para applies immediately, it is suggested that banks may start the exercise soonest.

Reporting to RBI

Any breach in the limits prescribed under the Directions is required to be reported to RBI within 15 days from occurrence of such breach, with reasons thereof and a plan to correct the same.

Actionables

• Board’s decision to continue or eliminate overlaps – call the board meeting as soon as the map is drawn, but in case of overlaps, draw up a clear rationale. In our view, pious statements such as business exigencies, customer service etc may not be sufficient. If the general principle of business exclusivity is a part of the regulatory philosophy, there has to be a compulsive or strong reason for an exception from the same.
• If the decision is to reshuffle portfolios, try to start the winding down process soon as no new business in the overlapped products can be transacted on or after 1st April, 2026. Disruption of customer service is the least expected objective of anyone – hence, the decision has to be very carefully drawn.
• Group-wide capital management policy. As regulatory capital is presently applicable only to banks and NBFCs, and NBFCs’ own capital requirements are higher than those for banks, in our view, the issue may be more from the viewpoint of ICAAP assessment, and the capital assigned for operational risks.
• Group wide risk management policy. This may significantly include any risks due to operational dependencies.
• Management analysis of investments in AIFs, REITs and InvITs. In our understanding, AIF investments may be a challenge. Board-level action plan for bringing down the investments, and in case of Cat III AIFs, removing the same altogether.
• Identify agency and referral services, and see whether any referral services or the use of the bank’s premises for any third party products are being done currently.

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Read our articles on the same:

1. RBI proposes major regulatory restrictions on bank NBFCs and HFCs
2. Banks’ exposure to AIFs: Group-wide limits introduced
3. Bank group NBFCs fall in Upper Layer without RBI identification
4. New Commercial Bank Regulations: A ready reckoner guide
5. New NBFC Regulations: A ready reckoner guide