Holding co plan to impact PSU banks

The character of public sector banks and their relationship with the government could undergo a change as and when the Reserve Bank of India's (RBI's) proposal, circulated on Monday, for a holding company structure is implemented.

Under the model suggested by the RBI, a banking group will have a holding company at the top that will directly own the bank as well as other companies in the group.

For public sector banks, this means that the government will need to set up a holding company for, say, the State Bank of India (SBI) group.

The holding company will then own the SBI and other subsidiaries for non-banking businesses in the group. The government will only have indirect ownership in the SBI through the holding company.

In its discussion paper on holding companies in banking groups, the RBI has admitted that government holding through a banking holding company (BHC)/financial holding company (FHC) will not be possible for public sector banks under existing statutes.

Under existing laws, a subsidiary floated by a government-owned bank is treated as a private sector enterprise.

For example, when Industrial Development Bank of India (IDBI), in its earlier form as a development finance institution, set up IDBI Bank, the banking subsidiary was considered a private sector bank and not a public sector entity.

Similarly, the SBI's life insurance venture SBI Life Insurance Company, in which the country's largest bank owns 74 per cent, is also considered a private sector life insurer.

The central bank, however, said if statutes were amended to recognise the indirect holding structure, then the most important advantage in shifting to the BHC/FHC model would be that the capital requirements of the banks' subsidiaries would be delinked from the banks' capital.

Said M B N Rao, chairman and managing director of Canara Bank: "The holding company model will allow for harnessing the value of a bank's non-banking businesses. To that extent it leads to better corporate governance and total clarity in terms of ownership."

Rao, however, said the proposed holding company model also had to be viewed from the depositors' side. "The over-emphasis on investor/shareholder value maximisation should not dilute depositors' interest," he added.

The RBI's BHC/FHC model has not, however, been accepted well in some quarters. Ashvin Parekh, partner & national leader (Global Financial Services) at Ernst & Young, said the banking regulator strongly felt that the insurance business should be kept at arm's length from the bank, but "from the industry point of view, the regulator's point is not valid".

Deepak Parekh, chairman of Housing Development Finance Corporation Ltd (HDFC), had earlier advocated such a holding company structure for banks in India.

He had, however, stated that such a model would raise the issue of double taxation of dividend, since the dividend paid by the banking subsidiary would be taxed first and the holding company would again have to pay dividend tax when it paid dividend to its shareholders.

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