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In what could be a hint that large corporates may get a licence to float a bank, the Reserve Bank of India on Tuesday prescribed guidelines exclusively meant for bank transactions and exposures to the entities belonging to their own group.
The guidelines contain quantitative limits on financial Intra-Group Transactions and Exposures (ITEs) and prudential measures for the non-financial ITEs. This is to ensure that banks engage in ITEs in a safe and sound manner in order to contain concentration and contagion risks arising out of ITEs.
When it comes to single group entity exposure, a bank’s intra-group exposure limits have been pegged at 5 per cent of paid-up capital and reserves in case of non-financial companies and unregulated financial services companies.
This limit has been pegged at 10 per cent of paid-up capital and reserves in case of regulated financial services.
Aggregate exposureWhen it comes to aggregate group exposure, banks intra-group exposure limits have been pegged at 10 per cent of paid-up capital and reserves for all non-financial companies and unregulated financial services companies taken together.
This limit has been pegged at 20 per cent of paid-up capital and reserves in case of the group, that is, all group entities (financial and non-financial) taken together.
These ITE measures are aimed at ensuring that banks, at all times, maintain arm’s length relationship in dealings with their own group entities, meet minimum requirements with respect to group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures.
The RBI said the guidelines on ITEs will become effective from October 1, 2014.
In case, a bank’s current intra-group exposure is more than the limits stipulated in the guidelines, it should bring down the exposure within the limits at the earliest but not later than March 31, 2016.
The exposure beyond permissible limits subsequent to March 31, 2016, if any, would be deducted from the Common Equity Tier 1 capital of the bank.
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