IBA for intermediate holding firm plan

The Indian Banks' Association (IBA) would suggest to the Reserve Bank of India (RBI) that it permit banks to set up intermediate holding companies as an interim measure with stipulations that would provide comfort to the regulator.

The suggestion, formalised at a meeting of the managing committee of the IBA, is in response to a discussion paper put out by the RBI on banks moving to a banking/financial holding companies structure.

"The financial holding company is the way forward but that will take some time as it needs regulatory and legislative changes. Hence, in the interim banks should be permitted to float the intermediate holding companies with conditions that give the regulator (the required) comfort. The intermediate holding structure is the solution to ensure that financial conglomerates are not starved for capital,'' said a senior IBA official.

The RBI, in the discussion paper released on August 27, has expressed its discomfort with banks floating intermediate holding companies to transfer their insurance and asset management business.

The central bank's concern is that such a company would create an unregulated entity in the system. The central bank has given three weeks to respond to the discussion paper.

The banking regulator is of the view that banks are custodians of public deposits. Under the intermediate holding company model, the depositors will have to pay for any losses suffered by the insurance and asset management businesses.

"The depositor at the time of parking his savings with a bank is unaware of the possible risk. Failure of the insurance company to meet the obligations will indirectly put pressure on the resources of the bank. This could put the depositors of the bank at risk. A depositor parks his surplus funds in a bank account to get assured returns by way of interest. If he was willing to take risk, then he would have invested this surplus cash in equities where the returns are high,'' said a senior RBI official.

A public sector banker said "In India, we have multiple regulators. The formation of the intermediate holding companies will throw up new regulatory challenges. Unless there is a super regulator which has officials from RBI, Securities and Exchange Board of India (SEBI) and Insurance Regulatory Development Authority (IRDA), this model is not conducive as fingers will be pointed at RBi when there is any failure in the financial system.''

"We are hopeful that the RBI will permit banks to go ahead with the intermediate holding company model with some stipulations like capital adequacy, ensure that there is no leveraging, the net owned fund restriction is already in place,'' said a senior SBI official.

There is a section of bankers which is of the opinion that banks holding majority stake in insurance companies could divest stake to domestic player or the insurance company on a standalone basis could hit the market.

VIA MEDIA

• The Indian Banks' Association would ask the RBI to permit banks to set up intermediate holding companies as an interim measure
• The financial holding company is the way forward, but it will take some time as it needs regulatory and legislative changes
• Under the intermediate holding company model, depositors will have to pay for any losses suffered by insurance and asset management businesses