In a bid to create a level playing field for existing banks and new players that may soon get the banking license, the Reserve Bank of India (RBI) has imposed curbs on banks investing in their group companies. As per the norms, banks cannot lend more than 5% of their paid-up capital and reserves to a single non-financial company or unregulated financial company belonging to the same group, while their aggregate group exposure should not exceed 20%.
However, in a case where bank’s current intra-group exposure is more than the limits stipulated, it would be required to bring it down before March 31, 2016. Nevertheless, exposure through equity and other capital instruments would be exempted from this norm.
The measures, which would ensure banks maintaining arm's length relationship in dealings with their own group entities, meeting minimum requirements with respect to group risk management and group-wide oversight, and adhering to prudential limits on intra-group exposures, would come into effect in October, 2014. Almost all existing commercial banks, including foreign banks operating in India, will have to adhere to these norms.
Further, the central bank also has mandated banks not to enter into cross-default clauses i.e. clauses that trigger automatically when a lender declares that a loan is in default. It has barred banks from selling their bad loans to group entities other than asset reconstruction companies.
However, in a case where bank’s current intra-group exposure is more than the limits stipulated, it would be required to bring it down before March 31, 2016. Nevertheless, exposure through equity and other capital instruments would be exempted from this norm.
The measures, which would ensure banks maintaining arm's length relationship in dealings with their own group entities, meeting minimum requirements with respect to group risk management and group-wide oversight, and adhering to prudential limits on intra-group exposures, would come into effect in October, 2014. Almost all existing commercial banks, including foreign banks operating in India, will have to adhere to these norms.
Further, the central bank also has mandated banks not to enter into cross-default clauses i.e. clauses that trigger automatically when a lender declares that a loan is in default. It has barred banks from selling their bad loans to group entities other than asset reconstruction companies.
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