At a time when most banks have failed to convince the Reserve Bank of India (RBI) in allowing them to set up subsidiary companies, Federal Bank has revived its wholly-owned arm to expand its retail loan business.

The Kerala-based private sector lender’s arm, Fedbank Financial Services, has started a gold loan business and plans to offer car loans and loans against property, in addition to its distribution business. It would also enter the wealth management space at a later date, to provide services to high net worth clients.

While RBI has not issued any formal guidelines, in the recent past it has not allowed banks to form separate subsidiary companies for businesses that can be done through bank branches.

The banking regulator had nixed South Indian Bank's plan to form a gold loan subsidiary, Bank of India's proposal to set up a company to train its employees, and Lakshmi Vilas Bank's application for a housing finance arm. Proposals from ICICI Bank and Axis Bank to float infrastructure finance subsidiaries also did not find favour.

"We are aware that RBI does not want banks to set up separate subsidiaries for businesses that they can do through their own bank branches. But it is different in our case. The subsidiary was formed sometime back. We are just adding new lines to the existing businesses. The regulator has not raised any objection," a senior official of the bank told Business Standard, requesting anonymity because of the sensitivity of the issue.

Fedbank Financial Services was incorporated as a wholly-owned subsidiary of the bank in April, 1995. In 1998, it received a licence to operate as a non-banking finance company. But the license was surrendered and operations were suspended between 2001 and 2007.

In 2007, the company was revived and was acting only as a distributor of financial products on behalf of the parent bank. It applied for a fresh NBFC licence in 2009, which it received on August 24, 2010.

The company started offering gold loans from February, 2011 and plans to enter the secured assets business from next financial year.

"Unlike other banks, we did not apply for a new subsidiary," said another official, adding the bank will continue to do businesses like gold loans and car loan despite entry of Fedbank Financial Services in this space.

Currently, Federal Bank's gold loan portfolio is estimated around Rs 3,300 crore, while for Fedbank Financial Services it is close to Rs 300 crore. The bank has 938 branches, while its NBFC subsidiary has around 129 offices.

Source: Business Standard