RBI (Commercial Banks – Undertaking Of Financial Services) (Amendment) Directions, 2025

The Reserve Bank of India ("RBI") vide its notification dated December 5, 2025, has introduced the Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) (Amendment) Directions, 2025 ("Amended Directions") which amends the Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025 ("Master Directions"). The Amended Directions have been issued with the aim to strengthen governance standards across banks and their group entities. The Amended Directions have come into effect immediately on December 5, 2025.

Key Provisions of the Amended Directions:

Scope for Undertaking Lending Business

The Amended Directions expand the applicability of Paragraph 18(4) of the Master Directions, which sets out the conditions that are applicable to banks where lending business is undertaken through a group entity, to all non-banking financial companies ("NBFC") and housing finance companies ("HFC") that form part of a bank group. This ensures consistency and uniformity in compliance requirements for lending entities.

Key Definitions

The Amended Directions have introduced and revised several definitions under the Master Directions to remove ambiguity and provide clearer regulatory guidance.

Agency Business:

The Amended Directions have provided a comprehensive definition of 'Agency Business' that may be undertaken by a bank or its group entities, to mean an arrangement under which a bank or its group entity acts as an agent of a third-party product or service provider ("TPPSP"), without risk participation, to facilitate the sale of the latter's regulated financial products or services to its customers. Activities covered under 'Agency Business' arrangements may, inter-alia, include marketing, sales, promotion, initial point of contact for redressal of grievance and other after sale services related to the product or service.

Group Entity:

The Amended Directions have introduced the definition of 'Group Entity' to mean an entity that is a subsidiary or joint venture or associate of a bank. However, entities held under Non-Operative Financial Holding Company ("NOFHC") shall not be treated as group entities of a bank for the purpose of the Amended Directions.

Referral Services:

The Amended Directions clarify that banks may refer customers to TPPSPs by sharing information about their regulated financial products or services. However, banks must not participate in any TPPSP processes, allow their branding in TPPSP documents, or integrate TPPSP processes into their own platforms or premises, except for a simple redirect link to the TPPSP.

Departmentalisation of Business

The Amended Directions materially revise the regulatory framework for undertaking financial services within a bank group. All core banking activities, as defined under Sections 5(b) and 6(1) of the Banking Regulation Act, 1949 ("Act"), must now be carried out either departmentally or through a group entity established under Section 19 of the Act.

However, two core functions (i) the business of banking and (ii) acceptance of time deposits must be undertaken only departmentally, with an exception permitting time deposit acceptance by a housing finance company, where specifically allowed.

The Amended Directions have also introduced a 'one business-one entity' principle, requiring each form of business within a bank group (which shall include the bank and its group entities) to be housed in a single entity, unless the same is done with a proper rationale such as business segmentation/specialization, and is approved by the Board of the bank.

In the event lending activities are undertaken through a group entity (NBFCs including HFCs), such entities shall comply with the regulations applicable to Upper Layer NBFCs (except for the listing requirement) and adhere to key restrictions, for all the fresh/renewal and additional loans/limits sanctioned/disbursed by the NBFC group entities, that were previously applicable only to banks, including restrictions on financing promoter contributions, land acquisition, lending against shares.

The Amended Directions prohibit a bank from undertaking any new business in the respective segment from April 1, 2026 if such bank is not in conformity with the Master Directions. Banks are also required to submit a compliance status in this regard by March 31, 2026. However, banks have been authorized to service the existing facilities until their respective maturities.

The Amended Directions reiterate that certain financial services shall not be undertaken departmentally and shall be undertaken only through a separate group entity. This includes mutual fund operations, insurance activities, pension fund management, investment advisory services, portfolio management services and broking activities.

The Amended Directions enable NOFHC to undertake businesses in accordance with Section 5(b) and Section 6(1) of the Act, without obtaining prior approval of the RBI. However, in such cases, the NOFHC is required to intimate the RBI within 15 (fifteen) days from the date of the resolution of the Board for undertaking such businesses. Furthermore, the Amended Directions require NOFHC to obtain prior approval of the RBI in the event the entities held by it undertake any other business.

The Amended Directions mandate banks to obtain approval from RBI prior to undertaking any new form of business, whether directly or through a group entity, unless specifically exempted under the Master Directions and also mandate obtaining a no-objection from RBI for any overseas branch, including branches in IFSC, which would require prior RBI approval when undertaken domestically.

Investment Limits

The investment framework of the banks and bank groups has been comprehensively revised under the Master Directions:

Banks:

Banks may invest up to 10% (ten percent) of their paid-up capital and reserves in any entity (including group entities), and up to 20% (twenty percent), as per the last audited balance sheet or audited/ unaudited balance sheet of the latest quarter whichever is lower, in aggregate across all entities, including overseas investments. The amendment also clarifies that: (1) investments held under 'Held for Trading' category, subject to the limit stipulated under Section 19(2) of the Act; and (2) investments of up to 30% (thirty percent) in the equity of non-financial entities acquired through debt restructuring or for protecting bank's interest, are excluded from calculating the aggregate equity investment limit.

The Amended Directions further impose the following restriction: (1) banks may invest 20% (twenty percent) but not exceeding 30% (other than as a subsidiary), in the equity share capital of a non-financial services entity, engaged in non-financial business permissible for banks under Section 6(1) of the Act or is acquired by the banks pursuant to debt restructuring; (2) banks may sponsor only one ARC, and bank group's shareholding in any ARC shall be below 20% (twenty percent); and (3) banks under a NOFHC structure shall comply with the February 22, 2013 guidelines on licensing of new private-sector banks for their equity investments.

Bank groups:

A bank group may invest less than 20% (twenty percent) (with or without investment by the bank) in the equity share capital of an entity without prior approval if: (i) bank's capital to risk weighted assets ratio (CRAR), including the 'Capital Conservation Buffer', remains above the prescribed minimum after the investment; and (ii) the bank has reported net profits in the preceding two financial years. Further, the investments held under 'Held for Trading' category shall not require prior approval, subject to the limit stipulated under Section 19(2) of the Act. Furthermore, the Amended Directions have provided clarity on calculation of the investment limits of the bank group. It states that while the investments made by Asset Management Companies from the funds of the unit holders shall not be included in the aggregate investment limit, but the investment made by group entities of the bank from their own funds shall be included in calculating the aggregate investment limit of the bank group.

Other Conditions on Investments

AIFs, REITs and InvITs

The Amended Directions introduce a comprehensive framework governing investments in alternative investment funds, real estate investment trusts and infrastructure investment trusts. It imposes a restriction on banks from investing in Category III AIF scheme and from contributing, individually, more than 10% (ten percent) of the corpus of a Category I AIF scheme or Category II AIF scheme.

The Amended Directions authorize a bank group to make an investment not exceeding 20% (twenty percent) in the corpus of Category I or Category II AIF scheme, without the approval of RBI and to make an investment exceeding 20% (twenty percent) but less than 30% (thirty percent), with the approval of RBI. Further, investment by a bank's subsidiary in the corpus of Category III AIF scheme has been restricted to the regulatory minima prescribed by Securities Exchange Board of India.

The Amended Directions further restrict a bank from making an investment of more than 10% (ten percent) in the unit capital of a real estate investment trust ("REIT") or infrastructure investment trust ("InvIT") within the overall ceiling of 20% (twenty percent) of the bank's net worth permitted for all direct investments in shares, convertible bonds/ debentures, units of equity-oriented mutual funds and exposures to AIFs.

Other Conditions

The Amended Directions have specified that the bank's Internal Capital Adequacy Assessment Process shall, for the purpose of determining additional capital requirement, account for: (1) risks arising from equity investments in an AIF scheme, directly or through their group entities; and (2) group-wide capital and risk management policy with respect to the capital requirement and the risks faced by their group entities.

Importantly, the Amended Directions require banks to report any breach of investment limits to the RBI through the PRAVAAH portal within 15 (fifteen) days from the date of occurrence of such breach along with the reason for such a breach and a plan to correct the same.

The said Amended Directions provide a phased compliance framework and ensure orderly transition to the revised regime by requiring the banks which are not immediately compliant with the revised investment norms to submit an action plan by March 31, 2026, and achieve full compliance by March 31, 2028.

PMS and Market Infrastructure Activities

Lastly, the Amended Directions clarify that banks may become a 'Professional Clearing Member' for the equity derivatives segment of SEBI recognised stock exchanges, and the prudential criteria and conditions that currently apply to the commodity derivatives segment shall also be applicable to the equity derivates segment.

Analysis

The Amended Directions significantly strengthen the regulatory framework governing financial services undertaken by banks and their group entities. By tightening and clarifying the definitions of agency and referral services, the RBI has set clear boundaries for third-party product distribution. The revised investment norms include clearer caps, exclusions, and conditions, promote better control of risk concentration and avoid regulatory arbitrage through layered structures. New restrictions on investments in AIFs, REITs, and InvITs aim to limit banks' exposure to complex or leveraged investment vehicles. Collectively, the changes underscore the RBI's focus on enhancing governance, transparency, and systemic resilience.

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