Undertaking of Financial Services
Date of Issue: December 05, 2025
Objective: To ring-fence core banking businesses from non-core risks, ensure a level playing field, and rationalize the group structure of Regulated Entities (REs).
Executive Summary: The Reserve Bank of India has finalized the amendments proposed in the October 2024 Draft Circular. The central mandate is the “One Entity, One Business” rule and strict segregation of risk-bearing activities from core banking. Banks and their groups must now eliminate overlapping business lines.
1. Commercial Banks – Undertaking of Financial Services
Applicable Entity Scheduled Commercial Banks (excluding RRBs)
Specific Changes Required
- Ring-fencing Core Business: The core business of acceptance of deposits and lending must be undertaken departmentally by the bank. It cannot be pushed to a subsidiary unless specifically exempted.
- Forms of Business (Section 6(1) vs 19(1)):
- Permitted Departmentally OR via Subsidiary: Factoring, Primary Dealership, Credit Card Business, Housing Finance, Equipment Leasing. (Note: Bank must choose one mode; overlap is prohibited).
- Mandatory Group Entity (Subsidiary/JV): Risk-sharing activities such as Mutual Fund business, Insurance, Pension Fund Management, Investment Advisory, and Broking Services cannot be done departmentally.
- Prohibition of Overlap: Multiple entities within a Bank Group shall not undertake the same business or hold the same category of license.
Example: If the Bank offers Housing Loans, its Housing Finance Company (HFC) subsidiary must cease new business or the Bank must stop departmental housing loans. - Investment Limits (Prudential Norms):
- Max equity investment in a single entity (financial/non-financial): 10% of Bank’s paid-up capital and reserves.
- Aggregate equity investment in all subsidiaries/non-financial companies: 20% of Bank’s paid-up capital and reserves.
Management Action Plan
| Action Horizon | Required Steps |
|---|---|
| Immediate (0-3 Months) | Conduct a “Group Activity Mapping” to identify overlapping business lines between the Bank and its subsidiaries (e.g., lending products, credit cards). |
| Short Term (3-6 Months) | Decide the “Home” for each business line. If an overlap exists (e.g., Housing Finance), determine whether to merge the HFC into the Bank or divest the portfolio. |
| Medium Term (6-12 Months) | Initiate corporate restructuring. Surrender duplicate licenses held by group entities. Seek RBI approval for divestment or mergers. |
2. Small Finance Banks (SFBs) – Undertaking of Financial Services
Applicable Entity Small Finance Banks
Specific Changes Required
- Scope Restriction: SFBs are subject to the same “No Overlap” and “Ring-fencing” principles but tailored to their licensing scope (which prioritizes unserved sections).
- Subsidiary Restrictions: Stricter norms on SFBs forming subsidiaries for non-core activities. SFBs are generally expected to keep operations departmental and simple, avoiding complex group structures unless necessary for specific distribution activities (like Insurance/MF).
- Para-banking Activities: Departmental undertaking of insurance/mutual fund distribution is permitted, but risk-participation (underwriting) is strictly barred.
Management Action Plan
| Focus Area | Action Item |
|---|---|
| Structure Review | Ensure no “hidden” subsidiary or associate structures have formed that violate the SFB licensing conditions regarding group entities. |
| Distribution Agreements | Review third-party distribution agreements (Insurance/MF) to ensure they are purely “referral/distribution” and carry no risk participation or balance sheet exposure. |
3. Payments Banks – Undertaking of Financial Services
Applicable Entity Payments Banks (PBs)
Specific Changes Required
- Investment Caps: Since PBs cannot lend, the amendments focus heavily on Investment exposures. The cap of 10% of paid-up capital and reserves applies to equity investments in other entities (e.g., Fintech partners).
- Business Form: PBs are restricted from forming subsidiaries for activities that are outside their licensing scope. The amendment clarifies that PBs cannot use group entities to undertake lending activities indirectly.
Management Action Plan
| Focus Area | Action Item |
|---|---|
| Investment Portfolio | Re-calculate current equity holdings in non-subsidiary partners. If exposure exceeds 10% of Net Worth, formulate a glide path to reduce stake. |
| Partnership Audit | Audit all “Lending Partner” arrangements (BC model) to ensure the PB is not inadvertently assuming credit risk or acting as a shadow lender via guarantees. |
4. Non-Banking Financial Companies (NBFCs)
Applicable Entity NBFCs within a Bank Group & Deposit-taking NBFCs
Specific Changes Required
- Prevention of Arbitrage: NBFCs that are part of a Bank Group are now treated as “Upper Layer” equivalents for certain regulations. They cannot offer products that the parent Bank is restricted from offering.
- Lending Norm Application: Restrictions applicable to Banks regarding lending to Directors, relatives of Directors, and senior officers now apply mutatis mutandis to the NBFCs in the group.
- Cross-Holding Limits: The aggregate holding of the Bank Group in any investee company is capped at 30%. This prevents the Bank from using the NBFC to hold extra stakes in a company beyond the Bank’s own statutory limits.
Management Action Plan
| Focus Area | Action Item |
|---|---|
| Product Audit | Compare NBFC loan products with Parent Bank products. If they are identical (e.g., Gold Loans), the Group must choose ONE entity to continue the business. |
| Compliance Policy | Update the NBFC’s “Loans to Directors” policy to mirror the stricter Banking Regulation Act standards immediately. |
| Exposure Check | Consolidate investment data across Bank + NBFC. If Group holding in any external company >30%, plan divestment. |
5. Non-Operative Financial Holding Companies (NOFHCs)
Applicable Entity NOFHCs leading a Banking Group
Specific Changes Required
- Single Entity Principle: The NOFHC must ensure that within its entire group structure, only one entity undertakes a specific class of business (e.g., Insurance, Broking, Lending).
- New Entity Moratorium: (As per draft provisions incorporated) NOFHCs may be restricted from setting up new entities for a specified period (3 years) from commencement of business to ensure stability.
- Capital Flow: Stricter monitoring of double leveraging. The NOFHC cannot borrow to infuse equity into subsidiaries beyond prescribed limits.
Management Action Plan
| Focus Area | Action Item |
|---|---|
| Rationalization | If the NOFHC owns a Bank AND a separate NBFC doing lending, the NBFC must likely be merged into the Bank or liquidated to comply with the “One Entity” rule. |
| Capital Planning | Review the capital adequacy at the Consolidated Group Level (CGL). Ensure no double-counting of capital buffers between NOFHC and operating entities. |