On Friday, the Reserve Bank of India (RBI) issued a draft circular emphasizing that banks should not use group entities to bypass regulations applicable to them.
This guidance is part of the RBI’s ongoing efforts to strengthen prudential regulations for business forms and investments within the banking sector.
The draft circular states, “No group entity should be used to circumvent the rules or guidelines applicable to the parent bank or another group entity in order to carry on any business activity which is not normally permitted.”
This directive aims to ensure compliance and maintain the integrity of banking operations.
Avoiding Duplication and Seeking Approval
The circular further advises banks to avoid duplicating lending activities already offered by the parent bank and its group units.
To initiate any new business activity beyond those already permitted, banks must seek approval from the RBI’s regulatory department.
Additionally, the RBI highlighted the importance of clear operational boundaries within non-operational financial holding companies (NOFHCs).
The central bank stated that only one entity within an NOFHC should be allowed to engage in a specific business or activity, thereby ensuring better regulatory oversight and compliance.
