The Hindu Business Line : Banks cannot hold more than 10% stake in NBFCs

New norms
Bank exposure to a single NBFC shall not exceed 5 pc of the bank's net worth
Aggregate exposure of a bank to all NBFCs should not go beyond 40 pc of the bank's net worth

Mumbai , Nov. 3

Banks in India, including foreign banks, cannot hold more than 10 per cent of the paid-up equity capital of a deposit taking NBFC. The rule will not apply to investment in housing finance companies.

Banks have been given two months to comply with the edict, which could halt NBFCs from doubling for banks.

New norms

Bank exposure (lending and investment, including of balance sheet exposures) to a single NBFC shall not exceed five per cent of the bank's net worth as per its last published balance sheet. Further, the aggregate exposure of a bank to all NBFCs should not go beyond 40 per cent of the bank's net worth.

Bank sponsored NBFC will be allowed to offer discretionary portfolio management services to their clients, on a case-to-case basis.

"The ownership of NBFCs, which are subjected to a relatively less stringent regulatory and prudential framework, should be subjected to certain norms which will encourage improved governance so that regulatory arbitrage or circumvention of bank regulations are not resorted to. Further, the ownership pattern should be such that more than one entity in a group does not compete for public deposits.

Additionally, the principle of `holding out' will operate in a situation where an NBFC is within a bank group. Hence, the eventual fall out of the holding out principle will have to be factored-in, while banks decide on the extent to which they would like to be involved in an NBFC," says the RBI circular.

Comments to the draft guidelines, "The financial regulation of systemically important NBFCs and banks' relationship with them," issued by the RBI today will have to be sent in by November 17. The final circular will be issued before November 30.

All non-deposit taking NBFCs (ND) with an asset size of Rs100 crore and more will be considered as a systemically important NBFC. They will be able to raise borrowings only up to 10 times their net owned funds. All such entities will be required to maintain a minimum capital to risk-weighted assets ratio of 10 per cent. The present minimum capital adequacy ratio of 12 to 15 per cent will continue to be applicable for deposit accepting NBFCs (D). No single NBFC (ND) shall lend to any single borrower beyond 15 per cent of its owned funds. It cannot lend over 25 per cent of net owned funds to any single group of borrowers.

NBFCs set up under the automatic route can undertake only the 19 activities set down. Diversification into any other activity will require the prior approval of the Foreign Investment Promotion Board. (FIPB). The revised framework will not be applicable to the Residuary Non Banking Companies (RNBCs).

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