The present regulation does not give the banking regulator power to supervise bank subsidiaries, as the central bank can only monitor them. To enable this, RBI has written to the finance ministry to amend laws pertaining to the RBI Act, so that it can supervise such entities.
Supervisory powers will allow RBI to inspect the books of the subsidiaries, give directives and issue norms based on its own regulation.
“Banks have forayed into insurance, broking, mutual funds, private equity, and have become complex and large financial conglomerates. If the subsidiary fails, it can dent banks’ profitability and erode capital. To avoid such a situation, RBI wants to have supervisory powers,” said a source in the central bank.
The source also said the issue came to the fore when RBI wanted to inspect a broking arm of a bank but was not allowed by the market regulator, the Securities and Exchange Board of India.
In its letter to the government, RBI has said while it will supervise subsidiaries involved in non-banking activities, the sector regulator’s advice will also be sought.
“We will request for representatives from the insurance, market and pension regulators while forming the committee, which will supervise the subsidiaries,” said the source.
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In the recently released financial stability report, RBI had raised a red flag on the interconnectedness between a bank and its subsidiaries. “Inter-linkages between the insurance and banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer. The contagion between the banking and insurance sector will also depend on the insurance companies' overall exposure to banks,” RBI had said.
Citing the example of insurance companies promoted by banks, RBI said though the life insurance sector was well capitalised with solvency ratio exceeding the regulatory requirements, there had been a recent concern over non-life insurance companies. That was because the liability requirement and associated capital requirement for the mandatory motor third-party pool had increased and so had the underwriting losses in the non-life sector, it said.
“Reinsurance shares allow diversification of exposure and provide stability to the industry. Currently, the reinsurance capacity is readily available for most of the risks written in India and can support the activity of the insurance business. Even, in case of the failure of the reinsurance industry, it would only increase the price for getting reinsurance cover,” the report said.
