In the course of audits and inspections for FY22, officials of the RBI have questioned several private banks on the use of their non-bank arms to fund promoters, finance land purchase, lend against stocks, and give loans without end-use specification-transactions they could not have carried out on the banks’ books, thanks to stern dos and don’ts in banking regulations.
“Banks have been separately told to scale down such exposures. In many cases, they have been asked to fetch the end-use certification from borrowers… There is no one single directive in writing to all banks. But we are making it very clear to banks that you cannot use the NBFC (non-banking finance company) subsidiary to undertake activities that you cannot do in the bank,” an RBI official told ET, requesting anonymity.
Over the past two decades, the growth of the capital market, listing of companies on stock exchange and the expansion of the realty industry have fuelled demand for loans against pledge of shares to bet on initial public offerings, carry out creeping acquisition, or simply trade in the secondary market, while developers, heavily dependent on usurious private lenders, tapped banks for institutional finance.
Banks, which have severe restrictions on exposures to share brokers, builders and stock investors, overcame the regulatory hurdles by incorporating NBFCs, primarily as wholly-owned subsidiaries, to do the businesses, which, though in some cases risky, were lucrative.
Sidestepping the rules to offer a bouquet of services (through the NBFC) was done largely to preserve and thicken relationships with corporate groups. However, at times, it encouraged sharp practices like evergreening of loans-deals where the NBFC or the life insurance or asset management arm of the bank subscribing to debentures to let a corporate repay a bank loan to escape default and before the loan became a non-performing asset (NPA).
“RBI never quite liked such transactions but several banks had their way using their clout. But of late RBI has become very vocal and is bent on minimising regulatory arbitrage. We hear (RBI) deputy governor (MK) Jain is very serious about it. Probably, with the HDFC and HDFC Bank merger over, the regulator is preparing to lay down the rules on non-bank arms of banks,” said the CEO of a large bank.
The regulator, with its strong reservations about regulatory arbitrage, took a grandfathering approach-refusing permission to more banks from forming non-bank arms while letting those who were earlier granted NBFC licence to continue running their non-bank shops.
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