RBI has relaxed the norms for banks to invest in other financial services firms by doing away with prior approval of the banking regulator if they pick under 10 per cent stake in such companies. This would be applicable for profitable banks with comfortable capital adequacy ratio, it said on Wednesday.
Moreover, the overall investment by the particular bank along with its subsidiaries and joint ventures in the same investee in the financial services space would need to be less than 20 per cent of its paid-up capital.
This would be applicable for banks that have a capital risk weighted asset ratio (CRAR) or capital adequacy ratio of 10 per cent or more and have reported a profit in the previous financial year.
CRAR represents the ratio of bank’s assets to its risk. A bank with higher CRAR is considered safe as it can cover its net worth if the loans turn bad. With the incidence of non performing assets (NPAs) rising, the RBI has been wary of CRAR as it had dipped to six year low for some of the big banks.
The move would make it easier for banks with strong balance sheets to invest in other financial services firms including financial institutions, stock and other exchanges, depositories.
In another notification issued on Wednesday, the central bank changed the classification norms for loans and advances granted to CEOs and whole-time directors.