The Indian Central bank is keeping a close eye on the foreign banks which are soliciting new business through their non-banking finance arms. Foreign banks are at present restricted from opening new branches as per the Reserve Bank India (RBI) norms.

RBI governor Y.V. Reddy said as long as NBFCs owned by foreign banks are doing non-banking business, the Central bank is fine with it. “The NBFCs can do legitimate business but we have also noticed circumvention of norms,” Reddy said in an exclusive interview with this newspaper. “We will take immediate action on this,” he promised.

The governor’s comments came after many foreign banks opened NBFC arms began giving loans. Without naming any NBFC, Reddy said RBI guidelines on NBFCs are quite clear and foreign banks should keep an arm’s length distance between the two businesses.

At present, the NBFCs owned by foreign banks are restricted from lending to their related party with the same parent operating in India. The RBI is considering various options to end this practice and plug any loophole if it exists. RBI is also planning to make the Basel-II which has strick corporate governance norms applicable to foreign-bank owned NBFCs.

The governor said a draft circular is now almost ready and it would be made public soon. A top RBI official later confirmed that the circular will be released tomorrow. “We will be releasing the circular tomorrow. The law needs to be tightened,” the official said.

Apart from know your clients norms, the RBI is also looking at strict vigilance over the use of funds and purpose of floating NBFC by foreign banks.

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