RBI imposed restrictions on intra-group investment by banks
In a bid to mitigate the financial risk from concentration of business, the Reserve Bank of India (RBI) imposed curbs on banks investing in their group companies.
Objective of ITEs measures: To ensure that banks maintain arm’s length relationship in dealings with their own group entities, meet minimum requirements with respect to group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures.
As per the RBI’s guidelines on management of Intra-Group Transactions and Exposures (ITEs)
Banks are allowed to invest 5% of their paid-up capital in the case of non-financial companies and unregulated financial services companies. The limit is 10 % for regulated financial services companies.
- Fixed an aggregate group exposure limit for intra-group transactions at 20% for all financial and non-financial entities taken together and limited 10% for non-financial and unregulated entities.
- Banks should ensure they have systems and controls in place to identify, monitor, manage and review exposures arising from intra-group transactions.
- Banks must also ensure transactions in low-quality assets with group entities aren’t carried out to hide losses or window-dress balance sheets.
- If the intra-group exposure, either at the single entity level or at the aggregate level, exceeds prudential limits, it should be reported at the earliest in the prescribed returns along with the reasons for the breach.
- In such situations, banks cannot undertake any further intra-group exposure (at the entity or aggregate level, as the case may be) until it is brought down to within the limit.
- Banks should submit data on intra-group exposures to the RBI (Department of Banking Supervision, Central Office), from the quarter ending December 31, 2014.
- By March 31, 2016, banks will have to reduce their intra-group exposure that exceeds the prescribed limit. At that time, the additional exposure would be deducted from the bank’s common equity Tier-I capital. The apex bank might impose a penalty for frequent breaches of the prescribed limits.
- The guidelines will become effective from October 1, 2014.
Note: As per existing norms, a bank can take single borrower exposure upto 25% of bank total capital and upto 55% for group exposure.