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Holding companies for banks

HOLDING PROMISE: A view of the State Bank Of India building in Chennai. — FILE PHOTO

The Indian banking sector is entering another crucial phase in its evolution with the Reserve Bank of India proposing the formation of holding companies in banking groups. While some banks have already made the first moves by setting up ‘intermediate holding companies’ by creating layers within the corporate structure, the central bank has suggested that a financial holding company (FHC) or a banking holding company (BHC) will offer considerable advantages as t he banks will be much better protected against possible adverse effects from the activities of their non-banking financial subsidiaries.

“The financial services sector in India has been witnessing growth in the emergence of financial conglomerates,” the RBI has stated, adding, “With the enlargement in the scope of the financial activities driven by the need for diversification of business lines to control the enterprise-wide risk, some of the players are also experimenting with structures hitherto unfamiliar in India.” Obviously, the central bank was referring to the state-owned premier bank of the country, the State Bank of India (SBI) and the largest private bank of the country, ICICI Bank, which had recently taken steps to set up ‘intermediate holding companies’ for their non-banking operations such as insurance and asset management.

The RBI’s proposal gives details of global models along with their advantages and disadvantages. It also emphasises the need for wider discussion for coming up with a new policy framework. “It is a step in the right direction to meet an emerging industry need,” said Sanjay Aggarwal, National Industry Director, Financial Services, KPMG, a leading global consulting firm.

Broadly there are three areas to be evaluated and optimised: synergies and cost efficiency; risk management along with capital adequacy; and regulatory supervision and control. A new structure should be able to balance all these three aspects. A simple holding company structure may permit optimising all these three aspects. However, it gets complicated in the event of multiple ‘intermediate holding companies’ spread globally to reap tax advantages. The RBI also reasons that multi-layering of the corporate structure is not considered good from the investors’ point of view as they will not know where their will be eventually used. “Thus, it becomes difficult for them to assess the true risk involved in their investments.”

The issue of holding companies for Indian banks gains relevance mainly because banks with insurance subsidiaries propose to unlock their value by bringing in strategic investors, without listing. “The banks prefer the structure of an intermediate holding company and making private placements or bringing in strategic investors to unlock the valuations as they do not wish to have an Initial Public Offering (IPO) at this nascent stage of their insurance businesses,” said a top banker who preferred anonymity. This move by banks will also help boost the share prices of the banks.

“Being a regulated entity, the intermediate holding company would be subject to RBI’s supervision, including the requirement to provide such information as RBI may require. Banks having intermediate holding companies for their non-banking financial subsidiaries are also covered by the RBI’s circulars on para banking and the various regulations pertaining to non-banking financial companies by which the RBI is empowered to exercise supervision and control over such intermediate companies. A proposal to transfer a bank’s holding in its insurance and asset management subsidiaries to an intermediate holding company will not in any manner increase the current risks faced by the bank in relation to its non-banking businesses,” the proponents of intermediate holding companies for banks argue.

FHC or BHC structure would be the most ideal as banks and their depositors would be effectively separated from the non-banking financial businesses in the group. However, it is not possible to immediately constitute an FHC or BHC structure in the Indian context due to various statutory and regulatory issues involved, Anil K. Khandelwal, Chairman and Managing Director of Bank of Baroda and Vice-Chairman of the Indian Banks’ Association, said. Besides, he said, there could be an issue of supervisory oversight due to the presence of multiple regulators in the Indian system instead of a super regulator overseeing the entire financial market.

The central bank feels that there should be no scope for regulatory arbitrage when a bank adopts a new structure and any structure so envisaged should not have an intermediate entity which operates in a regulatory vacuum. A middle path needs to be found. The central bank could prescribe an intermediate structure which, over a period of time — with a road map — could be strengthened to come up to its regulatory expectations, as a financial holding company or a banking holding company.

OOMMEN A. NINAN

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