IBA seeks multiple holding models

The Indian Banks' Association (IBA) wants the Reserve Bank of India (RBI) to allow multiple holding company models in India. This suggestion has been made by the IBA in its response to the RBI discussion paper on holding company structures for banking groups.

The RBI discussion paper states the financial holding company (FHC) and bank holding company (BHC) structures are suitable in the Indian context, as banks and their depositors would be effectively separated from the non-banking financial businesses in a group.

"It is difficult to specify only one model in India especially when the intermediary financial company is in the evolving stage. Taxation and stamp duty issues may arise in case the creation of an FHC or a BHC for an existing conglomerate requires transfer of shareholdings or assets between entities, which would need to be addressed by each conglomerate," says the IBA's response.

The intermediate holding company will insulate the bank to a large extent from the future capital requirements of other businesses as the intermediate holding companies would be able to raise capital independent of the bank, says the IBA.

However, the RBI does not seem to agree to this view. "In the intermediate holding company structure, the father continues to be the bank which leaves the banks vulnerable to the risk associated with the insurance and asset management company.

The depositors interest is at risk. The financial holding structure model is the ideal model it will take time. But that will insulate the bank completely. Under the intermediate holding model there is no way to ensure that the capital raised is not mixed up,'' said senior RBI official.

IBA adds that the intermediate model will not lead to complexity in regulation as expressed by the RBI as all the existing banking and non banking entities and the intermediate holding company would be subject to regulation by their respective regulators.

Additionally, it will also be monitored by the principal regulator under the financial conglomerate supervision regime.

"Unlike the United States where the Federal Reserve is the single regulator in India we do not have a concept of a principal regulator. Hence, the IBA's point of a principal regulator monitoring the conglomerate has no relevance in the Indian context,'' said a banking analyst.