RBI floats guidelines of management of ITEs; cap banks’ investment in group business

16 Aug 2012 Evaluate

As a prudential measure aimed at avoiding concentration of credit risk, the Reserve Bank of India (RBI) has decided to cap banks’ intra-group exposure to own group entities at 20% of the paid-up capital and reserves. As per the RBI's draft guidelines on 'Management of Intra-Group Transactions and Exposures' (ITEs), the banks can invest a maximum of 5% of their paid-up capital and reserves in the case of non-financial or unregulated financial services companies. While the exposure could go up to 10% of net worth for a single regulated financial services entity of a group. The central bank has prescribed an aggregate group exposure limit where total investment in all group companies put together cannot exceed 10% of paid-up capital and reserves in case of non-financial services companies and also 10% for regulated financial service companies.

These measures are aimed at ensuring that banks, at all times, maintain arms length relationship in their dealings with the Group entities, meet minimum requirements with respect to Group risk management and group-wide oversight, and adhere to prudential limits on intra-group exposures. However, the Apex Bank has mandated banks to operate within these limits, as above, on an ongoing basis and report their exposure, on a quarterly basis. However, if the exposures exceed the stipulated limits, the same should be reported without delay, with an acceptable rationale of the cause of the breach to Department of Banking Supervision, Central Office (DBS, CO) of the RBI.

Further, on being satisfied, RBI may permit the bank an appropriate timeline within which the bank should comply with the stipulated limits. Any excess over the limits would be deducted from the Common Equity Tier 1 capital of the banks until the limits are restored, as mentioned in the draft guidelines. However, failure to comply within the given timeline by these banks, would result in imposition of penalties or prohibition on the bank to undertake further intra-group transaction and exposure with other Group entities.

Additionally, as per the guidelines, banks should avoid entering into cross-default clauses where a default by a group entity becomes ground to trigger an obligation for the bank. Also, banks should not purchase low-quality assets from Group entities or for that matter accept that as collateral for a loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of the Group entity.

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