RBI Eases Reorganisation Norms for Bank Groups, Reducing Operational Disruption: Crisil Ratings

The Reserve Bank of India (RBI) has issued its final Commercial Banks – Undertaking of Financial Services Directions, 2025, marking an important regulatory shift for India’s banking ecosystem. According to Crisil Ratings, the revised directions ease the need for large-scale restructuring across several bank groups while simultaneously strengthening regulatory compliance. The guidelines aim to balance operational flexibility with regulatory uniformity, ensuring that banking groups can maintain efficiency while reducing regulatory arbitrage.

Context: Why the Guidelines Matter

The RBI released draft guidelines in October 2024, proposing stringent conditions such as allowing only one group entity to conduct a specific lending activity, with no overlaps permitted between the bank and its subsidiaries.

If implemented fully, these rules would have required 12 major bank groups, accounting for 55% of sectoral advances, to undergo significant operational restructuring.

The final guidelines, however, tone down some requirements, offering relief to banks while preserving broader regulatory objectives.

Key Features of the Final RBI Guidelines (2025)

1. Flexibility on Overlapping Lending Activities

One of the most notable changes is that bank group entities are now allowed to maintain overlapping lending businesses, provided,

• The board approves such operations
• Entities adhere to enhanced compliance and reporting norms
• This prevents disruption and allows banks and NBFC subsidiaries to continue serving diverse customer segments efficiently.

2. Strengthening Regulatory Alignment

While flexibility has increased, several strict regulatory elements from the draft have been retained,

• Upper-layer scale-based regulations will apply to NBFCs within bank groups
• Bank-like lending restrictions extended to NBFCs in the same group
• 20% ceiling on a bank group’s shareholding in an Asset Reconstruction Company (ARC)
• Restrictions on specific loan segments to avoid risk asymmetries
• These measures standardise oversight and minimise loopholes.

Impact on Indian Bank Groups

Avoided Operational Disruption

According to Crisil,

• 12 bank groups would have required restructuring under draft norms
• This would have impacted 2–6% of their consolidated lending portfolios
• However, the final guidelines ensure no major operational disruption due to the allowed overlap in lending activities.

Continued Strength Leveraging

Banks and their group NBFCs can continue to,

• Focus on distinct market segments
• Leverage digital capabilities
• Maintain cost-effective operations

This supports business continuity while still promoting group-level governance.

Compliance Requirements for NBFCs

Upper-Layer NBFC Norms

Of 26 bank group entities currently engaged in lending,

• Only two are officially classified as upper-layer NBFCs
• The remaining entities must comply with upper-layer norms (except listing requirements) by March 31, 2028

This includes,

• Enhanced risk management frameworks
• Stricter capital requirements
• Governance and disclosure enhancements

Restrictions on Specific Activities

• If an associate NBFC or HFC conducts lending activities not permitted for banks, such activities must be discontinued to align group-level risk.

Investment Ceilings and ARC Shareholding Limits

• The RBI has retained several limits on investments by banks and their subsidiaries.

20% Shareholding Cap in ARCs

• A bank group cannot hold more than 20% in an ARC
• Currently, 13 ARCs have bank shareholding
• Only two cases exceed the 20% threshold
• Any excess shareholding must be divested by March 2028

Crisil notes that changes in ownership will influence credit risk assessments for affected ARCs.

Static Facts

• Guidelines: RBI’s “Commercial Banks – Undertaking of Financial Services Directions, 2025”
• Key Change: Overlapping lending businesses allowed with board approval
• Impact Avoided: 12 bank groups spared restructuring of 2–6% of consolidated advances
• ARC Shareholding Limit: 20% cap, divestment by March 2028 if exceeded
• NBFC Requirements: Upper-layer norms apply except listing, compliance by March 31, 2028