Banks will be allowed to undertake pension fund management (PFM) through their subsidiaries only. Setting the guidelines for banks planning to enter pension fund management, the Reserve Bank of India has said that banks should not undertake the business departmentally.

Only those banks which have net worth of not less than Rs 500 crore and credit adequacy ratio of up to 11 per cent during the last three years along with other qualifying parameters could approach RBI for the purpose, the RBI guidelines on banks undertaking PFM business said.

According to the RBI, composition of the board of directors of the subsidiary should be broad based and should be as per the guidelines, if any, prescribed by the Pension Fund Regulatory and Development Authority (PFRDA). “The parent bank should maintain ‘arms length’ with the subsidiary. Any transaction between the bank and the subsidiary should be at market related rates. Any further equity contribution by the bank to the subsidiary should be with the prior approval of the Reserve Bank and limited to 10 per cent of its own paid-up capital and reserves,” the RBI said.

The bank’s total investment by way of equity contributions in its existing subsidiaries, the proposed pension funds subsidiary and those formed in future together with portfolio investments in other financial services companies should not exceed 20 per cent of its paid-up capital and reserves, it said.

The parent bank’s board should lay down a comprehensive risk management policy for the group as a whole including the subsidiary, incorporating appropriate risk management tools. “It should also ensure effective implementation thereof. The bank should evolve a suitable system to monitor operations of the subsidiary. The subsidiary should confine itself to the business of pension fund management and any other business, which is purely incidental and directly related thereto,” the RBI said.

... contd.