RBI's draft exposure norms to affect banks' investment in subsidiaries

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/rbis-draft-exposure-norms-to-affect-banks-investment-in-subsidiaries/articleshow/15567234.cms

The Reserve Bank of India's draft guidelines on exposure to their own group non-financial and financial affiliates would have a negative credit impact on banks subsidiaries, said Moodys, the rating company. 

If the RBI adopts them, the new guidelines would be credit positive for India's banks, but credit negative for group companies that rely on parent banks for capital and brand support. The guidelines would limit to 5% of paid-up capital and reserves a bank's exposure to a single group non-financial entity, while the maximum exposure to regulated financial services companies would be 10%. 

Banks' aggregate exposure to all non-financial and financial units and unregulated group finance would be 20%.

The rules would benefit India's banks because they would reduce their concentration and contagion risks from group activities. In addition, the guidelines would increase disclosure of related-party exposure for Indian banks, which would improve risk analysis and facilitate better comparisons with global peers. 

The changes would clear doubts about how banks interpret group exposures rules and enable them to clearly know how much support they can provide to group entities. "The proposed rules would hurt companies that depend on parent banks for capital and brand support, particularly those with large international operations, or those that operate insurance (both life and non-life), securities or asset management businesses that need capital and liquidity support to meet their business needs," said the rating company. 

Under the new regime, parents would still provide full management support, but their financial support would be limited. The affected banks include ICICI Bank Limited (Baa3 stable; D+/baa3 stable), State Bank of India(Baa3 stable; D+/baa3 stable), Bank of India (Baa3 stable; D/ba2 stable), Bank of Baroda(Baa3 stable; D+/ba1 stable) and Kotak Mahindra Bank

The guidelines would lead these banks to re-examine the financial support they provide to group businesses as anything exceeding the stipulated limits would be detrimental to their standalone capital calculations and thus their business growth.