Business

Holding companies mooted for banks

MUMBAI: The Reserve Bank of India on Monday mooted a proposal to set up financial holding companies (FHCs) or banking holding companies (BHCs) for Indian banks “as the banks would be much better protected from possible adverse effects from the activities of their non-banking financial subsidiaries.”

In its discussion paper on ‘Holding companies in banking groups,’ which released for public comments, the RBI stated that in many countries, deregulation and financial consolidation have led to the development of financial holding companies, allowing commercial banking, insurance, investment banking and other financial activities to be conducted under the same corporate umbrella.

“In fact, it may also be possible to consider allowing non-banking subsidiaries under the FHC/BHC structure to undertake riskier activities hitherto not allowed to bank subsidiaries such as commodity broking,” stated the discussion paper. However it added that “a proper legal framework needs to be created before such structures are floated and it is ensured that no unregulated entities are present within the structure.”

The financial services sector in India has been witnessing a growth in the emergence of financial conglomerates. With the enlargement in the scope of the financial activities driven by the need for diversification of business lines to control the enterprise-wide risk, some of the players are experimenting with structures so far unfamiliar in India. In this context, it is considered opportune to take a review of some of the conglomerate structures and assess their suitability for the country given the prevailing legal, regulatory and accounting framework and highlight the regulatory and supervisory concerns emanating from such structures. “The RBI has prepared the discussion paper on holding companies in banking groups in this context. The RBI would take a policy view in the matter based on the comments received,” it stated. The RBI also invited comments, which should be sent within three weeks to Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office, Sahid Bhagat Singh Marg, Mumbai - 400 001.

PTI reports:

The discussion paper comes at a time when State Bank of India and ICICI Bank have announced plans to create a holding company to raise capital for their insurance and asset management businesses.

While SBI is yet to come out with the holding company structure, ICICI Bank has already got the government approval for selling 24 per cent stake in its holding companies. However, the RBI is yet to give its approval on the stake sale to foreign entity.

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