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Unless otherwise specified, these
directions shall not be applicable to overseas branches and subsidiaries of
banks.
The
‘business of financial services’ shall mean –
a.
the
forms of business enumerated in the Banking Regulation Act, 1949;
b.
the
forms of business enumerated in Reserve Bank of India Act, 1934;
c.
business
of credit information;
d.
operation
of a payment system;
e.
operation
of a stock exchange, commodity exchange, derivatives exchange or other exchange
of similar nature;
f.
operation
of a depository;
g.
business
of a securitisation or reconstruction company;
h.
business
of a merchant banker, portfolio manager, stock broker, sub-broker, share
transfer agent, trustee of trust deeds, registrar to an issue, merchant banker,
underwriter, debenture trustee, investment adviser and such other intermediary;
i.
business
of a credit rating agency;
j.
business
of a collective investment scheme;
k.
business
of managing a pension fund;
l.
business
of an authorised person; and
m. business as
specified by Reserve Bank from time to time.
GENERAL
GUIDELINES
Forms
of Business:
(a) Unless specified
otherwise, a bank desirous of undertaking businesses permitted under the
Banking Regulation Act, may do so either departmentally or through a separate
subsidiary.
(b) An activity
undertaken departmentally shall be subject to the following conditions:
i.
There
shall be a policy for the activity including the various risks associated with
it and suitable risk mitigation measures.
ii.
The
guidelines on KYC/AML/CFT applicable to banks, issued by RBI from time to time,
shall be complied with.
iii.
The
general principles as enunciated in the Charter of Customer Rights issued by
RBI shall be adhered to.
iv.
The
specific conditions prescribed for the businesses shall be complied with in
addition to the regulations of regulators.
v.
No
bank shall engage in a financial activity other than those stated without the
prior approval of RBI.
(c) A bank may also
hold equity in both financial and non financial services companies within the
limits specified under the Banking Regulation Act, and subject to the
prudential limits on investments.
Prudential
Regulation for Banks’ Investments:
Investment
in a subsidiary or in a financial or a non-financial services company not being
a subsidiary shall be subject to the following conditions:
(a)
Limits
on investments by Banks:
i.
Equity
investment, individually, shall not exceed 10 per cent of the bank’s paid-up
share capital and reserves.
ii.
Aggregate
of equity investment in factoring subsidiaries and factoring companies shall
not exceed 10% of the bank’s paid up capital and reserves.
iii.
No
bank shall contribute more than 49 per cent of the equity of Infrastructure
Debt Fund set up as a NBFC.
iv.
A
bank contributing less than 30 per cent of the equity of IDF-NBFC shall not be
a sponsor.
v.
No
bank shall –
a.
Hold
more than 10% in the equity of a deposit taking NBFC. This does not apply to a
housing finance company.
b.
Hold
more than 10% of the paid up capital/unit capital of a venture capital fund / Category
I Alternate Investment Fund.
c.
Hold
more than 10% of the paid up capital of a company, not being its subsidiary
engaged in non-financial services or 10% of the bank’s paid up capital and
reserve, whichever is lower.
Investments
in excess of 10% but not exceeding 30% shall be permissible in the following
circumstances:
(i)
the
investee company is engaged in non-financial activities permitted for banks; or
(ii) the additional
acquisition is through restructuring of debt/ (CDR)/ (SDR), or to protect the
banks’ interest on loans/investments made to a company. The bank shall submit a
time bound action plan for disposal of such shares to RBI.
vi. The aggregate
equity investments shall not exceed 20% of the bank’s paid-up share capital and
reserves. For compliance with this limit, the following investments
shall be excluded:
a.
investments
held under ‘Held for Trading’ category that are not held beyond 90 days;
b.
investments
in excess of 10% in non-financial companies acquired through restructuring of
debt/ (CDR)/ (SDR), or to protect the banks’ interest on loans/investments made
to a company.
(b)
Requirement
for approval of Reserve Bank of India:
i.
investment
in a subsidiary and a financial services company that is not a subsidiary. Prior
approval shall not be necessary in the following circumstances:
a.
The
investment is in a company engaged in financial services;
c.
The
bank has made a profit and has a CRAR of 10% or more at the close of the preceding financial year; and
d.
The
shareholding of the bank, including the proposed investment is less than 10% of
the investee company’s paid up capital; and
e.
The
aggregate shareholding of the bank along with shareholdings, by its
subsidiaries or joint ventures or other entities is less than 20% of the
investee company’s paid up capital.
ii.
investment
in a non-financial services company in excess of 10% of such investee company’s
paid up share capital.
Procedure
for Application:
A bank desirous of making an investment
that requires prior approval shall make an application with the details of
intended equity contribution, Board Note and Resolution approving the bank’s
proposal and the details of bank’s existing equity contribution, to Reserve
Bank of India.
Relationship
with Subsidiaries:
Sponsor bank shall maintain an
"arm’s length" relationship with its subsidiary and evolve the
following supervisory strategies:
(a) The Board of
Directors of the Sponsor bank shall review the working of subsidiaries and undertake
inspection/audit of its books at periodical intervals.
(b) The subsidiary
shall not undertake any new business or set up another sudsidiary without prior
approval of RBI.
(c) The subsidiary
shall not make any portfolio investment in another company for acquiring
controlling interest, without prior approval of RBI. This shall not apply to
the investments made by a VCF/AIF-I set up by a subsidiary.
(e) A subsidiary
shall not have any on-line access to customers’ accounts maintained with the
bank.
(f) The bank shall
not grant any unsecured advances to the subsidiary without prior approval of
the Reserve Bank.
(g) No preferential
treatment shall be given to the subsidiary vis-à-vis a counterparty with
similar risk characteristics.
FINANCIAL
SERVICES UNDERTAKEN BY A BANK
Sponsoring
of an Infrastructure Debt Fund (IDF)
IDFs
can be set up either as a Mutual Fund (IDF-MF) or a NBFC (IDF-NBFC) subject to:
(a) The bank shall
have a Board approved limit for the exposure, including the exposure as a
sponsor of IDF.
(b) The bank shall
ensure that the IDF, while inviting investments, makes a disclosure that the
sponsoring bank’s liability is limited to the extent of its contribution to the
paid up capital.
Equipment Leasing and Hire Purchase
Business
(a) A bank intending
to form a subsidiary for undertaking equipment leasing and hire purchase
business shall be as mentioned in the General Guideline.
(b) Equipment
Leasing and Hire Purchase business undertaken departmentally shall be subject
to:
i.
Equipment
leasing and hire purchase shall be treated at par with loans and advances and
shall be subject to the prudential norms.
ii.
A
bank shall not enter into leasing agreement with another equipment leasing
company and other NBFC engaged in equipment leasing.
Factoring Services
(a) A bank intending
to form a subsidiary for undertaking factoring business shall be subject to the
conditions mentioned in the General Guideline.
(b) Factoring
business undertaken departmentally shall be subject to:
i.
Factoring
services shall be provided on with recourse or without recourse or on a limited
recourse basis.
ii.
All
underwriting commitments pertaining to the credit risk on the debtor, under
without recourse factoring, shall be in accordance with the Board approved
limits.
iii.
A
thorough credit appraisal of the debtors shall be carried out before entering
into any factoring arrangement or establishing lines of credit with the export
factor.
iv.
Factoring
services shall be extended for invoices representing genuine trade
transactions.
v.
Factoring
shall be treated on par with loans and advances and shall be subject to prudential
norms on loans and advances.
vi.
To
avoid double financing, a mechanism for sharing information about common
borrowers will be put in place. The bank shall obtain periodical certificates
from the borrower about factored receivables. Factors shall also ensure to intimate
the limits sanctioned to the borrower to the concerned banks. Information
available on CERSAI shall also be considered.
Explanation:
A
common borrower is a person/entity who has availed a credit facility
from a bank and is also the assignor under factoring arrangement.
vii.
Credit
information regarding the non-payment of dues shall be furnished to the Credit
Information Companies.
a.
Exposure
shall be reckoned on the assignor for factoring on with-recourse basis.
b.
Exposure
shall be reckoned on the debtor for factoring on without-recourse basis. Exposure
shall be on the import factor in cases of international factoring.
c.
The
exposure shall be reckoned on the ‘assignor’ or the ‘debtor’ or the ‘import
factor’, for factoring on limited recourse basis, depending on the terms of
agreement.
Primary Dealership Business
(a)
A
bank intending to form a subsidiary for undertaking primary dealership business
shall be required to be registered as an NBFC. The bank shall directly approach
DNBR, RBI for the same.
(b)
Primary
dealership business undertaken departmentally shall be subject to the authorisation from IDMD. The bank
shall directly approach IDMD for the same.
Underwriting
Activities
A bank intending to engage in
underwriting of issues of shares, debentures and bonds shall do so either
departmentally or through a merchant banking subsidiary. This shall be subject
to the General guidelines mentioned above.
Mutual Fund Business
(a) No bank shall
undertake mutual fund business with risk participation except through a
subsidiary/joint venture.
(b) Where a
sponsoring bank undertaking the mutual fund business lends its name to the bank
sponsored mutual fund, a suitable disclaimer clause shall be inserted while
publicising new schemes to the effect that the bank is not liable
or responsible for any loss or shortfall resulting from the operations of the
scheme.
Insurance Business
(a) No bank shall
undertake insurance business with risk participation except through a
subsidiary/joint venture, subject to:
i.
It
has a networth of Rs.1000 crore and its minimum net worth shall not be less
than Rs.500 crore after investing in the equity of such company;
ii.
Its
CRAR is not less than 10 per cent after investment;
iii.
Its
level of net NPA is not more than 3%;
iv.
It
has made a net profit in the preceding three financial years; and
v.
The
track record of the performance of its subsidiaries, if any, is satisfactory.
(b) Bank shall set
up a subsidiary/joint venture company for undertaking insurance broking and
corporate agency only if:
i.
Its
net worth is not be less than Rs.500 crore after investing in the equity
of such company;
ii.
It
complies with conditions stated (a) ii, iii, iv and v above.
(c) A bank may act
as an insurance broker departmentally subject to the conditions mentioned on
insurance agency business.
Pension
Fund Management by Banks
No bank shall undertake the business of
pension fund management except through a subsidiary set up for the purpose,
subject to:
i.
Its
net worth shall not be less than Rs.500 crore after investing in the equity of
such company;
ii.
Its
CRAR is not less than 10% after investment;
iv.
It
has made a net profit in the preceding three financial years; and
v.
The
track record of the performance of its subsidiaries is satisfactory.
Investment Advisory Services
No bank shall undertake the business of
investment advisory services (IAS) except through a separate subsidiary set up
for the purpose or one of its existing subsidiaries, subject to:
i.
Specific
prior approval shall be obtained before offering IAS.
ii.
IAS
shall be provided only for products and services in which banks are permitted
to deal in as per the Banking Regulation Act, 1949.
A bank presently offering IAS shall
reorganise its operations in accordance with these Directions latest by April
21, 2019.
Portfolio
Management Services
(a) No bank shall
start or introduce any new portfolio management service (PMS) or similar scheme
or set up a subsidiary for the purpose without the approval of RBI.
(b) A bank already
undertaking PMS departmentally as on the date of these Directions shall ensure
compliance with the following conditions:
i.
PMS
shall be in the nature of investment consultancy/management, for a fee,
entirely at the customer's risk without guaranteeing, either directly or
indirectly, a pre-determined return.
ii.
The
fee charged shall be independent of the return to the client.
iii.
Funds
shall not be accepted for portfolio management for a period less than one year.
In case of placement of funds by the same client on more than one occasion, each
placement shall be treated as a separate account.
iv.
Funds
accepted for portfolio management, shall not be entrusted to another bank for
management.
v.
Portfolio
funds shall not be deployed for lending in call money/bills market, and lending
to/placement with corporate bodies.
vi.
The
bank providing PMS shall maintain client wise account of funds, and all credits
and debits shall reflect in such account.. The account holder shall be entitled
to get a statement of his portfolio account.
vii.
The
bank’s own investments and investments belonging to the PMS clients shall be
kept distinct from each other. Transactions between the bank’s investment
account and portfolio account shall be strictly at market rates.
viii.
The
bank shall maintain a ‘Clients’ Portfolio Account’ in its general ledger,
reflecting the funds received by it for portfolio management. The balance lying
in this account shall be treated as outside borrowings of the bank and it shall
maintain CRR/SLR on such funds. The bank’s liability to its clients shall be
properly reflected in the bank’s published books of accounts.
ix.
There
shall be a clear functional separation of trading and back office functions
relating to banks' own investment accounts and PMS accounts.
x.
PMS
accounts shall be subjected by banks to a separate audit by external auditors.
(c) The aforesaid
conditions shall, mutatis mutandis, be applicable to the subsidiaries of
banks as far as they are not contradictory to regulations of RBI or SEBI,
governing their operations.
Agency Business
by Banks:
(a) Agency business
shall be undertaken only for the products and services in which a bank is
permitted to deal in as per Banking Regulation Act.
(b) The service
shall be provided at a fee, without any risk participation.
(c) Agency business
of mutual fund companies undertaken departmentally shall be subject:
i.
The
investors’ applications for any transaction shall be forwarded to the mutual
funds/registrars/transfer agents.
ii. The purchase of
units shall be at the customers’ risk without the bank guaranteeing any assured
return.
iii. No mutual fund
units shall be acquired from the secondary market or bought back from a
customer for selling it to other customers.
iv. Extension of
credit facility to individuals against the security of mutual fund units shall
be in accordance with the Master Directions on Credit Management.
v.
A
bank shall keep the investments of the customers distinct from its own
investments.
(d) Corporate agency
of insurance companies undertaken departmentally by banks shall be subject:
i.
There
shall be a Board approved policy encompassing the model of insurance
distribution, issues of customer appropriateness, suitability and grievance
redressal.
ii.
The
deposit to be maintained by an insurance broker as per the IRDA, shall be
maintained with a scheduled commercial bank other than itself.
iii.
The
bank shall ensure customer appropriateness and suitability as under:
a.
All
employees dealing with insurance business shall possess the requisite
qualification prescribed by IRDA.
b.
There
shall be standardised system of assessing the suitability of products for a
customer and the transaction processes shall be segregated. Products with
investment components shall require the bank to necessarily undertake a
customer need assessment prior to sale whereas pure risk term products with no
investment or growth component shall be deemed as universally suitable
products.
c. The bank shall
treat its customers fairly, honestly and transparently, with regard to
suitability and appropriateness of the insurance product sold.
iv.
It
shall be ensured that performance assessment and incentive structure for staff
is not violative of the BR Act, or the guidelines issued by IRDA. It shall also
be ensured that no incentive is paid to the staff engaged in insurance services
by the insurance company.
v.
The
bank shall not force a customer to opt for products of a specific insurance
company or link sale of such products to any banking product. It shall be stated
in all publicity material that the purchase of any insurance products is purely
voluntary.
vi.
A
robust internal grievance redressal mechanism shall be put in place for
resolving issues related to services offered. It shall be ensured that the
insurance companies whose products are being sold also have robust customer
grievance redressal arrangements. The bank shall facilitate the redressal of
grievances.
Referral
Services
Banks shall offer referral services only
for financial products other than insurance, on a non-risk participation basis.
Retailing
of Government Securities
Banks can undertake business of
retailing of Government Securities only with non-bank clients subject to the
Directions issued by RBI.
Membership
of SEBI approved Stock Exchanges
(a) No AD Category I scheduled
commercial bank shall become a trading/clearing member of the currency
derivatives segment of the SEBI recognised stock exchanges unless -
ii.
Its
CRAR is not less than 10%;
iii.
Its
net NPA does not exceed 3% and
iv.
It
has made a net profit in the preceding three financial years.
A
bank not meeting the aforesaid conditions may participate in the currency
futures market as a client.
A
bank that is a trading/clearing member shall keep its own and its clients’
position distinct from one another.
(b) A bank which intends to become a
member of a SEBI approved stock exchange for the purpose of undertaking
proprietary transactions in the corporate bond market shall do so, subject to
satisfying the membership criteria of the stock exchanges and complying with
the regulatory norms laid down by SEBI and the respective stock exchange.
EXEMPTIONS,
INTERPRETATIONS AND REPEAL
Exemptions
RBI
may grant extension of time to comply with or exempt any bank from the
provisions of these Directions either generally or for any specified period,
subject to conditions as it may impose.
Interpretations
RBI may issue
necessary clarifications in respect of any matter covered herein and the
interpretation given by it shall be final and binding on all the parties
concerned.
Based on RBI circular dated 26/05/2016.
For any further clarification, please refer www.rbi.org.in
…….Poppy
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