The proposal by banks to float holding companies has been revived after nearly three years. The Reserve Bank of India (RBI) today announced the formation of a working group to draw a roadmap for introducing a holding company structure for Indian banks.
The committee, which will have representatives from the government, RBI, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Indian Banks’ Association, will also suggest the required legislative amendments and a framework.
A financial holding company is set up to insulate a bank from reputational and other risks of subsidiaries within the group. It’s followed by many financial conglomerates in advanced economies.
Large banks such as ICICI Bank, State Bank of India and HDFC Bank, which were keen to set up holding companies, welcomed the move. These plan to set up subsidiary holding firms for their insurance and mutual fund businesses.
“Many banks have evolved into financial conglomerates. Unlike in global markets, where a holding company invests in various businesses, banks in India have primarily invested in the financial services business. There should be a holding company and operating companies. A bank should operate as a bank. It’s a very good step,” said Chanda Kochhar, managing director and chief executive officer of ICICI Bank.
The Committee on Financial Sector Assessment of RBI had observed that the absence of the holding company structure in financial conglomerates exposed investors, depositors and the parent company to risks, and strains the parent company’s ability to fund its core business. It could also restrict growth of subsidiary businesses, it said.
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SBI Chairman OP Bhatt said while this was a good initiative, it should be taken to its logical conclusion “as soon as possible”.
HDFC Bank Managing Director and Chief Executive Officer Aditya Puri also emphasised the need for faster action. “It’s an issue for the private as well as the public sector. When you have institutions involved in multiple businesses, it is a very good idea. The faster it’s done, the better it is,” Puri said.
Bankers said certain legislative changes might be required.
To ensur e effective cross-border supervision and supervisory co-operation, the central bank also proposed a bilateral memorandum of understanding with overseas supervisory authorities within existing legal provisions and consistent with the Basel Committee on Banking Supervision principles.