It is aimed at ensuring that banks maintain arms length relationship in their dealings with the group entities

In a move to avoid a systemic risk in the financial sector in future, the Reserve Bank of India (RBI) has issued draft guidelines to limit the exposure of banks to their group companies, which would be applicable to all banks, including foreign banks.

The proposed exposure limit to a single group entity, which is a non-financial services company and unregulated financial services company, would be 5 per cent of paid-up capital and reserves of a bank, and, if the single group entity is a regulated financial services company, the exposure limit would be 10 per cent.

In case all non-financial services and unregulated financial services companies are taken together, the aggregate group exposure of a bank would be 10 per cent of paid-up capital and reserves of it. It would be 20 per cent in case all group entities (financial and non-financial) are taken together. “Banks should operate within these limits on an on-going basis and report their exposure, on a quarterly basis to the RBI,’’ it said.

“Failure to comply with the norms may also lead to imposition of penalties or prohibition on the bank to undertake further intra-group transaction and exposure with other group entities or both,” the RBI added.

“These measures are aimed at ensuring that banks, at all times, maintain arms length relationship in their dealings with the group entities,” said the apex bank in its draft guidelines on ‘Management of Intra-Group Transactions and Exposures (ITEs)’.

Banks should not purchase a low-quality asset from group entities. Further, a low-quality asset should not be accepted as collateral for a loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of the group entity.

“Banks must ensure that the transfer or sale of low-quality assets to group entities, whether regulated or unregulated, is not done for the purpose of hiding losses or window-dressing of balance sheets,” it added.

On cross-selling of products, the RBI said that “if banks engage in marketing or distributing the financial products of the group entities to their own customers, banks should ensure that the identity of the seller of the product is prominently disclosed and displayed in the relevant marketing material, product documentation and the same is also explicitly conveyed while marketing the product by the bank’s staff or agents through the branches, ATMs, telemarketing, e-mails or any other place or means.”

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