The banking regulator is expected to come out with a more stringent regulatory framework. The changes are likely to be effected through an amendment to the Banking Regulations Act.
Most public sector banks have set up businesses including in insurance, factoring and housing finance. The government has for some time been nudging them to exit such investments and unlock capital for funding their core business. It now wants the lenders to undertake a detailed assessment and prepare the ground for the possible change to the regulations, said an official.
“The RBI is reviewing the existing framework with an aim to segregate the core and non-core businesses of banks in order to prevent any conflict of interest between the two,” said an official aware of the matter, adding that the government wanted state-run lenders to be proactive so that they could align with the new framework sans any disruption.
The issue has figured in the ongoing deliberations between state-run lenders and the government on a specific three-year strategic roadmap for the banks, said another person familiar with the discussions. Each bank’s case is being reviewed individually.
“Banks should have these norms as a part of their business strategy going forward,” he said.
The central bank is looking to restrict the scope for regulatory arbitrage currently available to the banks and their entities and has been holding deliberations with stakeholders since August this year.
“This could mean alignment of guidelines for banks and NBFCs, consolidation of group entities of the bank that undertake similar activities, and a ceiling for investment by banks in non-core business entities,” said a senior bank executive who did not wish to be named.
According to experts, interconnectedness between the various sub-industries within financial services poses significant financial stability risks on account of any contagion caused by second-order effects of challenges within one or more of the sub-industries.
“The amended framework will have greater expectations of regulatory oversight from bank holding companies and may increase the cost of compliance for both private sector and public sector banks, but more so for public sector banks given the challenges in implementation they may face,” said Vivek Iyer, partner and national leader, financial services, at consulting firm Grant Thornton Bharat.
In April, after the PSB Manthan – a meeting of the leadership of state-run banks – the government had asked banks to set up a three-year roadmap for their business strategy. It also suggested that PSBs explore more collaboration among themselves, with larger banks sharing their best practices with smaller ones and guiding them in areas where they need more expertise.