The Reserve Bank of India has asked banks to set aside more capital for their investments in subsidiaries with equity stake of more than 20% instead of 30% in the past.
Banks like Union Bank of India , Andhra Bank , Federal Bank, Oriental Bank of Commerce and some small-to- mid-sized private banks will now have to earmark higher capital. RBI has said the move is aimed to strengthen the supervision of financial conglomerates.
An internal group regulating financial conglomerate suggested that the threshold of significant influence or investment may be fixed at 20% instead of the present 30%. Union Bank, Andhra Bank, Federal Bank and OCB, which have equity in the range of 20-30% in the insurance subsidiary, will have to set aside more capital.
The new norms requiring banks to set aside investments in associate companies will impact banks which have minority stakes in life insurance companies.
Earlier, these banks had to set aside the entire investments in the paid-up equity of these associates from tier I capital. Henceforth, such investments shall be deducted at 50% from tier I and 50% from tier II capital. The new regulations, however, have a downside for banks that have invested between 20-30% in insurance ventures. Earlier, investments up to 30% had no impact on capital adequacy, but henceforth, investments over 20% will see the bank’s capital position being affected.
Simultaneously, there is an attempt to limit banks’ exposure in activities other than financial services. RBI said it will soon stipulate a prudential limit on banks’ investment in subsidiaries other than non-financial services. As of now, banks do not require prior approval from RBI to invest in companies that are not in financial services.
However, it fears that banks may be able to exercise control on such entities through their direct or indirect holdings or have significant influence over them. As a result, banks may indirectly undertake activities not permitted to them under Banking Regulation Act, 1949, or involve activities which are not conducive to the spread of banking in India or otherwise useful or necessary in the public interest. For instance, both the State Bank of India and IDBI Bank each have an information technology subsidiary.
Similarly, HDFC Bank has investments in HBL Global Private which is engaged in providing the bank with direct sales support for certain products of the bank and it also has investments in Softcell Technologies which provides business-to-business software services.
On regulating financial conglomerate of entire investments in the paid-up equity of the entities, 50% should be deducted from tier I and 50% from tier II.
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