RBI’s new bank-subsidiary norms to force realignments of business

MUMBAI: Several large banks will have to realign their business models to comply with a recent Reserve Bank of India (RBI) proposal, which, upon implementation, would impact the valuations of parent banks and their financial services subsidiaries, said auditors of various banks.

At the heart of the guidelines is the regulator’s view that core activities – deposit mobilisation and lending – should reside within a bank rather than its subsidiaries and that there should not be any overlap in business activities between a bank and its subsidiaries.

Auditors said that the proposed guidelines may impact the valuation of HDB Finance, which is planning an IPO. Most of its lending services overlap with those of its parent, HDFC Bank. Similarly, the guidelines could affect half a dozen Kotak Mahindra Bank-linked entities that provide different types of loans which overlap with those of the parent.

The RBI does not want banks to use step-down entities to circumvent norms that do not apply to them. Effectively, some subsidiaries may remodel themselves as direct selling agents of the bank, a senior bank official said. The RBI has sought feedback from banks by November 20 on the draft guidelines.

Home Loans

Examples of overlapping business include banks such as ICICI Bank, Punjab National Bank, Canara Bank and Central Bank of India which provide home loans. Each has a subsidiary offering a similar product to retail customers. PNB Housing Finance and Can Fin Homes are listed at exchanges, unlike ICICI Home Finance and Cent Bank Home Finance. Auditors said once the guidelines are implemented, home loan products are likely to reside with banks rather than their subsidiaries since it is overlapping, and the RBI would prefer lending activity to be with the bank.

Other Overlaps
Several non-banking finance company (NBFC) subsidiaries of some of the largest banks provide overlapping products. HDB Finance and its parent bank provide gold loans, two-wheeler loans and personal loans, while Axis Finance, a subsidiary of Axis Bank, gives loans to small entrepreneurs as well as loans against property, home loans and personal loans.BSS Microfinance and Sonata Finance, both wholly-owned subsidiaries of Kotak Mahindra Bank, provide microfinance loans, and so is their parent. Kotak Mahindra Investments lends to “real estate and other segments” while Kotak Mahindra Prime provides finance to retail consumers and dealers in the passenger vehicle and two-wheeler segments, as well as retail consumers in the loan against property segment, according to its annual report.