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Executive Summary

In a landmark regulatory move, the Reserve Bank of India (RBI) has relaxed its earlier proposed restrictions on business overlaps within banking groups. Effective October 5, 2025, bank-promoted Non-Banking Financial Companies (NBFCs) are now permitted to operate in the same or similar lines of business as their parent banks. This change restores operational flexibility, enhances infrastructure financing capacity, and reflects the RBI’s increased trust in governance at the board level.

Background: The Earlier Restriction

Under the draft Scale-Based Regulation (SBR) framework, the RBI had proposed that within a banking group, only one entity could engage in a specific financial activity. This meant that banks and their NBFC subsidiaries could not lend or operate in overlapping sectors such as housing, vehicle, or infrastructure finance. While the intent—to avoid double gearing and concentration of risk—was prudent, this restriction caused practical difficulties for diversified banking groups. Several large banks faced the challenge of restructuring, merging, or winding down successful NBFC subsidiaries.

RBI Withdraws Overlap Restriction — The October 2025 Shift

On October 5, 2025, the RBI officially withdrew this restriction, allowing banks and their NBFC subsidiaries to operate parallel business lines. The regulator clarified that the responsibility of allocating activities among group entities now rests with bank boards, provided prudential safeguards are maintained. This marks a shift from prescriptive rules to principle-based supervision, where the quality of governance—not rigid restrictions—determines operational freedom.

Practical Impact for NBFCs

• Greater Lending Flexibility: NBFCs promoted by banks can expand across segments such as retail, MSME, and infrastructure financing without structural barriers.
• Optimized Capital Deployment: Parent banks can strategically allocate capital and liquidity across group entities for efficient risk-return management.
• Reduced Regulatory Burden: Banking groups no longer need to restructure or divest overlapping portfolios, saving time and reducing compliance friction.
• Enhanced Market Confidence: Investors welcome this reform as a sign of regulatory maturity and stability, leading to positive sentiment for bank-affiliated NBFCs and their parent banks.

Compliance and Governance Considerations

Though the overlap restriction has been removed, certain supervisory expectations remain:

• Arm’s-Length Transactions: Inter-entity dealings must comply with fair value and transfer pricing principles.
• Board Oversight: Group boards should document the rationale behind overlapping businesses and disclose governance efforts in annual reports and risk disclosures.
• Transparent Reporting: RBI may require consolidated disclosures of overlapping exposures and inter-group transactions during inspections.
• Ongoing Monitoring: Compliance teams must stay vigilant to RBI clarifications under the evolving Master Direction framework to ensure alignment.

Why This Matters for India’s Financial Sector

This reform is consistent with the RBI’s broader goal to foster an efficient, innovative, and well-governed financial ecosystem. By empowering regulated entities to manage internal overlaps responsibly, the central bank promotes:

• Increased credit flow to priority sectors, including infrastructure
• Broader customer reach via diversified product offerings
• Improved governance through board-led decision-making
• Reduced structural disruption for large banking groups

This policy shift reflects a pragmatic, forward-looking regulatory philosophy—balancing strategic autonomy with robust prudential oversight.

Steps for Bank-Promoted NBFCs

• Review and update internal business overlap policies with documented board approvals.
• Revise group governance charters and related-party transaction frameworks.
• Align RBI returns and disclosures with the new operating models.
• Clearly communicate strategic benefits and risk mitigation measures to investors and credit-rating agencies.

Conclusion

The RBI’s October 2025 decision underscores growing regulatory confidence in the self-governance capabilities of India’s large financial groups. For NBFCs tied to banks, it opens pathways for renewed growth, innovation, and stronger market positioning. For the financial sector as a whole, it is a clear signal that robust governance is now the cornerstone of regulatory trust.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement.

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