RBI Tightens Rules: Banks Banned from High-Risk Funds, Unsecured Loans to Group Entities

The Reserve Bank of India (RBI) has issued new draft guidelines to stop banks and their group companies from bypassing existing rules. The guidelines include instructions for banks not to invest in highly leveraged funds, avoid giving unsecured loans to their subsidiaries, and refrain from giving any special treatment to these subsidiaries.

Banks are also directed not to allow their subsidiaries access to customers’ online accounts. However, they can share customer information with subsidiaries if they maintain a clear separation between the two.

In its updated draft circular on financial services, the RBI said that banks are not allowed to invest in category III Alternative Investment Funds (AIFs), which focus on debt investments in highly leveraged companies offering high returns. The regulator also set a 10% limit on bank investments in real estate and infrastructure investment trusts.

Banks must now seek RBI approval before undertaking any new activities through their group companies. Additionally, a bank’s subsidiary is not allowed to create another subsidiary or start a new company without the RBI’s approval. The same goes for new business ventures.

If a bank wants to provide unsecured loans to its subsidiaries, RBI approval is required, and any financial dealings between banks and their subsidiaries must be conducted at arm’s length, meaning they should be treated like independent entities. Subsidiaries are also restricted from making investments in other companies to gain controlling interest without RBI’s approval.

Lastly, the RBI has barred banks from offering broking services for commodity derivatives but allows them to do so through a separate subsidiary or one of their existing subsidiaries, as long as that subsidiary doesn’t engage in proprietary trading in the commodities segment.