RBI issues draft guidelines for banks' intra-group deals

The Reserve Bank of India (RBI) on Tuesday issued draft guidelines on the management of intra-group transactions and exposures of banks. The regulator also sought comments on such guidelines before September 14, 2012. Thereafter, it is likely to issue the final prudential guidelines, which will help banks avoid concentration of credit risk.

The draft guidelines have set certain limits on banks' capital and reserve exposures to any single group entity and total group as well. Accordingly, a bank's exposure (to a single group entity) is capped at 5% of paid-up capital and reserves in case of non-financial services and unregulated financial services companies. Exposure can be doubled at 10% when the group company is a regulated financial services body.

However, a bank's aggregate group exposure has to be limited within 10% in case of non-financial and unregulated financial companies. The same should be at 20% when all group arms, both financial and non-financial, are taken together.

"The draft guidelines contain both quantitative limits for the financial Intra-Group Transactions and Exposures (ITEs)1 and prudential measures for the non-financial ITEs to ensure that the banks engage in the ITEs in safe and sound manner in order to contain the concentration and contagion risk arising out of ITEs," RBI said in a release.

"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."

If the guidelines are finalized, lenders should operate within those stipulated capital limits and should report to the department of banking supervision (DBS) at RBI's central office on a quarterly basis. If exposures cross the limits, the same should be brought to the central bank's notice immediately with "acceptable rationale".

"If satisfied, DBS may allow the bank an appropriate timeline within which the bank should comply with the stipulated limits. Any excess over the limits should be deducted from the Common Equity Tier 1 capital until the limits are restored. Further, failure to comply within the given timeline time if provided, 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," RBI cautioned.

Moreover, lenders are asked to frame a comprehensive policy on monitoring and management of intra-bank transaction and exposures. Later, the policy needs to be reviewed periodically by the individual bank.

Banks' financial statements also need to carry certain information related to group exposures. Those mandated information include: top-20 intra-group exposure, total amount of intra-group exposure, percentage of intra-group exposure to total exposure of the bank on borrowers/customers and details of breach of limits on intra-group exposures.

At the time of cross-selling the products of group entities, banks should strictly adhere to the specified norms in the master circular on Para-Banking Activities. The identity of the seller, according to the central bank, should prominently disclosed and displayed in the relevant marketing material, product documentation and the same ought to be explicitly conveyed while marketing the product by the bank’s staff/agents through bank branches.