Section 5(2) of the Banking Regulation Act, 1949 (“the Act”) defines “banking” as accepting of money deposits from the public for the purpose of lending or investment. Such deposits are repayable on demand or otherwise. Thus, the primary business of any bank is to accept deposits and provide loan. However, Section 6(1) of the Act permits banks to carry out other forms of business such as acting as agents, underwriting of shares, managing the issuance of shares for any company, etc. Given the potential risks and negative impact on public interest associated with these types of businesses, especially when it involves people’s money, the Reserve Bank of India (“RBI”) regulates such other activities carried out by the banks.

The existing regulations in the Master Direction- RBI (Financial Services provided by Banks) Directions, 2016 on Forms of Business and Prudential Regulations and now knows as Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025 (“Current Master Direction”) allows a bank to carry out banking business i.e. accepting deposits, providing loans and other businesses as listed down in Section 6(1) of the Act either on its own through internal departments or through a subsidiary subject to certain conditions.

In October 2024, the RBI reviewed the Current Master Direction to safeguard the core banking functions from the risks associated with non-core businesses, create a level playing field among banks, and enhance operational flexibility for investments in financial and non-financial companies, as well as Alternative Investment Funds. This article explores the key changes proposed in the draft circular released on October 4, 2024 (“Draft Circular”), and the potential implications of these proposed amendments on banking and finance companies.

Key changes proposed by the Draft Circular:

The Draft Circular states that the core banking business i.e. accepting of deposits and lending should be carried out only by the bank and not any of its group entities unless otherwise notified by RBI. Furthermore, any activity undertaken by a bank must receive approval from both the Risk Management Committee and the Board of Directors, a shift from the previous requirement of merely having a board-approved policy. The Draft Circular also lays down a clear demarcation between the activities that can be carried out only through group entities i.e. mutual fund business, insurance business with risk participation, pension fund management, investment advisory services, portfolio management services and broking services and those which can be carried out both departmentally as well as through group entities i.e. factoring, primary dealership, credit card business, housing finance, equipment leasing and hire purchase. Also, the Current Master Direction only mentions subsidiary/joint venture which is now proposed to be widened to group entity (associate/joint venture/subsidiary)

In addition to the above RBI has proposed that each entity in a bank group shall perform different permissible activities. Multiple entities cannot perform the same business i.e. there cannot be an overlap in the business activities. For Instance, if SBI Cards & Payment Services Limited offers credit card services to its customers then the Bank itself or any of its group entities cannot provide the same service. Furthermore, there should not be overlap in the lending activities carried out by the bank and its group entities.

Any group entity of a bank which is a NBFC shall comply with the scale-based regulations applicable to upper layer and restrictions with respect to loans and advances applicable to banks. Hence if a NBFC is a part of a bank’s group entity then it will have to comply with stringent regulations. It is clearly mentioned that, a group entity cannot be used to circumvent regulatory requirements and carry out any business which is not permissible otherwise. If any new activity is to be carried through group entity other than those permitted under Chapter III of the Current Master Direction and Section 6(1) of the Act then RBI approval shall be required.

It is proposed that certain activities such as sponsoring of an infrastructure debt fund, mutual fund business, insurance business, portfolio management services, pension fund management and investment advisory services can be carried out departmentally by the bank only with prior approval of RBI. These are high risk activities and currently except for sponsorship of infrastructure debt fund can only be carried out through subsidiaries. Other than this, the provisions regarding non-operative financial holding companies (NOFHC) [type of holding company whose sole business is to hold shares of a bank and other financial services companies within a corporate group] are new insertions.

RBI has also proposed changes with respect to prudential regulations for bank’s business. It is proposed that the requirement of RBI approval in case if the bank group together or individually wants to invest in any financial, non-financial company, category 1 or 2 AIFs should be increased from 10% to 20% of the investee company’s equity capital. This will reduce the operational burden on banks. Banks must also limit equity investment in any single company (including group entities) to 10% of their paid-up capital and reserves. Total equity investments across all companies, including overseas and group entities, must not exceed 20%, with some exclusions allowed. Additionally, investments in factoring entities are also capped at 10% of the same base.

The following new insertions have also been proposed:

Aggregate shareholding of a bank group in any Asset Reconstruction Company (ARC) shall be less than 20% of the company’s equity capital and it may sponsor only one ARC.
The aggregate shareholding of bank together with its group entities should not be more than 30% in the any investee company (other than those specifically permitted).
The bank should not directly or indirectly through a trustee company or otherwise hold shares, whether as pledgee, mortgagee, or absolute owner, of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less.
For banks under a NOFHC structure, ownership in any financial or non-financial services company is capped at 10%.
Any breaches of these limits must be reported to the RBI within seven working days.

Some of the key insertions such as restriction regarding overlapping businesses, compliance with upper layer NBFC scale-based regulation, aggregate cap on shareholding in ARCs etc shall come into effect 2 years after the release of the final circular. This indicates RBIs intent of providing time to these financial institutions to restructure their businesses and make necessary changes.

Clarifications to be sought:

It is pertinent to note that post the significant push back from the banking industry on provisions pertaining to overlapping business, RBI in its in statement of development and Regulatory policies released on October 1, 2025, indicated that it may remove the provisions pertaining to overlapping business from the Draft Circular. However, thereafter no further revised circular has been issued by RBI.

In the event the said provision is not done away with RBI will need to clarify whether the differentiator between a bank’s lending product and its NBFC’s lending product shall be determined on the basis of the type of product offered or by the customer profile. For instance, some banks may argue that the loans they offer through their NBFCs are different from those they would offer through the bank, and therefore should be treated separately.

RBI should clarify that whether services provided in different jurisdictions would also fall under the purview of the restrictions imposed. For Instance; Kotak Mahindra Asset Management Company Limited and Kotak Mahindra Asset Management (Singapore) Pte Limited are both Asset Management arms of Kotak Mahindra Bank in India and Singapore respectively. Considering that there is an overlap in services provided, will the Bank need to shut one of its arms? The circular only says that the application is extended to the overseas branches of Banks but it is silent regarding its application to overseas group entities.

Key Impact of the Changes Proposed:

The restriction on carrying overlapping businesses and lending activities within a bank’s group entity is likely to have a significant impact. As per several reports, this draft proposal is likely to have an effect on several private sector banks such as HDFC Bank, Axis Bank, Kotak Mahindra Bank, and Federal Bank which have overlapping businesses and lending activities. Some specific examples of overlapping services provided by a bank and its group entities are as follows:

Kotak Mahindra Bank provides Loan against securities which is also provided by its subsidiary Kotak Mahindra Investments Limited. Thus, this may be considered as an overlap in lending activities.
Punjab National Bank and Punjab Housing Finance Limited (Subsidiary of PNB) both provide home loans.
HDFC Bank provides various services such as deposits, loans including home loans, investment services, etc. On the other hand, HDFC Sales Private limited also provides services such as housing loans and finance.

Thus, they will have to re-align their businesses and close down several activities. Axis Bank recently stated that it is reviewing and evaluating the implications of the proposed regulatory norms. In light of this, the bank is reassessing its plans to sell a stake in its non-banking subsidiary, Axis Finance, and has decided to await greater clarity on the final guidelines before determining its course of action. Actions like this may significantly impact the profits because of which there may be a decline in their lending capacity. There will also be a change in the investment decisions to be taken by banks and they will have to plan their investments together with the group entities. On the other hand, the increased regulatory oversight may lead to a reduction of risk, greater accountability, and transparency.
The Draft Circular will also potentially have an impact on the Global Capability Centres (GCCs) which are operated in India by foreign banks. GCCs located in India provide several services such as technological support, risk management, data processing, documentation, and reporting to international banks. Therefore, these centres function as extensions of global banks. The GCC Segment in India is rapidly growing and the profits are expected to double by 2026. They have become an important part of the banking landscapes by enabling increased efficiencies for their parent organisation. These GCCs will be impacted by the Draft Circular as they would be considered as group entities of the foreign banks which are enlisted as Scheduled Commercial Banks by RBI. For Instance, Societe Generale Global Solution Centre (SG GSC), which is a GCC centre of Societe General Bank and the joint venture between Societe General and SBI named SBI-SG Global Securities Services Pvt. Ltd both offer custody and fund management services, the prohibition on ‘overlap’, if enforced, could constrain certain arrangements.

Following the release of the Draft Circular, banks have responded by making certain recommendations. The RBI initially aimed to reduce the overlap between banks and their group entities while minimizing risks associated with non-core activities. Notably, through the Indian Banks’ Association (IBA), banks have jointly appealed to the RBI for an extension of the implementation timeline for the proposed regulations that limit overlapping lending between banks and their group entities. While the draft currently provides a two-year period for compliance, some banks are proposing up to five years to fully align with the new requirements. However, an official publication from the RBI is still awaited by banks regarding the directions on overlapping business activities.

Conclusion:

The proposed changes could present significant operational and financial challenges for banks, potentially impacting their profitability and group structures. While these amendments aim to mitigate risks and serve the public interest, they may also limit banks’ lending capacities, which could hinder economic activity. As businesses, banks require profitability to thrive, and excessive regulation may infringe on their autonomy.

– Authored by Sweta Mehta, Associate Partner and Aneeka Kairanna, Assessment Intern