The Reserve Bank of India on Wednesday directed banks intending to amalgamate/merge non-banking finance companies with themselves to take prior regulatory approval.

This move is aimed at ensuring that the post-merger bank continues to be in compliance with the legal provisions contained in the Banking Regulation Act, 1949 and other relevant statutes and also the regulatory prescriptions of the central bank.

This directive is significant, coming as it does in the wake of Ashok Leyland Finance Ltd's amalgamation with IndusInd Bank. A few years back the Twentieth Century Finance Corporation had merged with the Centurion Bank.

The central bank, it appears, is concerned about the health of banks after NBFCs are merged with them. Though such mergers give banks the size in terms of assets, there are issues concerning their quality, income recognition, asset classification and provisioning norms.

As the situation obtains now, the boards of a bank and an NBFC consider and approve the scheme of amalgamation. The scheme comes into effect subject to necessary consent and approval of shareholders, creditors of both the financial entities.