The Hindu Business Line : Norms tightened for bank investments in associates

“The investments of a bank in the equity as well as non-equity capital instruments issued by a subsidiary, which are reckoned towards its regulatory capital, according to norms prescribed by the respective regulator, should be deducted at 50 per cent each, from Tier I and Tier II capital of the parent bank, while assessing the capital adequacy of the bank on ‘solo’ basis, under the Basel I framework,” said the circular.

Earlier, only the equity investments of a bank required deduction and that too only from Tier I capital. Also, no such deduction is required for a bank’s investment in associates.

“This would mean that there would be a deduction from both Tier I and Tier II capital. Banks would now have to raise more capital to maintain their capital adequacy if they have a subsidiary,” said a banker.

An “associate” is defined by the RBI as an entity in which the parent bank has an equity stake exceeding 30 per cent but less than 50 per cent of the paid-up capital of the investee entity.

For banks which have insurance companies, mutual funds, credit card companies and primary dealerships as their subsidiaries, the revision in norms may mean an additional strain on existing capital.

The subsidiaries of banks will also face an additional strain on capital if they invest in the equity and debt capital instruments of the parent bank.

The RBI circular said that “investments made by a banking subsidiary in the equity or non-equity regulatory capital instruments issued by its parent bank, should be deducted from the subsidiary’s regulatory capital at 50 per cent each from Tier I and Tier II capital, in its capital adequacy assessment on a solo basis, under Basel I and Basel II frameworks. In addition, under the Basel II framework, the same treatment would be applied to the investment by a banking associate also, in its parent bank”.

In the case of non-banking financial subsidiaries, however, their investments would be governed by the norms of the respective regulators of such subsidiaries.

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