The Hindu Business Line : Holding banks back?

In its concern for regulation, the RBI discounts the ambition in Indian banks to think big. Its model may hamper growth, rather than give it free rein.

The Reserve Bank of India’s Discussion Paper on Holding Companies for Banks is not just an academic study of the framework for a bank’s diversification into various financial services. It is, at first glance, a response to an initiative set in motion by ICICI Bank and the State Bank of India, to form subsidiary holding companies for their insurance and other services. While the ICICI Bank proposal received a nod from the insurance regulator and the Foreign Inve stment Promotion Board, the latter because the proposed holding company would get foreign investments, the RBI seemed to have had some doubts and had withheld its clearance. The discussion paper tells us why and also suggests an alternative structure.

The proposals that prompted the RBI paper represent more than the ambitions of the country’s two largest banks. They reflect the evolution of the financial system to a higher stage of business and sketch out the organisational structures needed to get there. The issues are, therefore, two-fold but the central bank focuses on just the organisational aspect because of its prime concern with regulation. To this end, it reverses the relationship between the bank and the holding company for other businesses as contemplated by both ICICI Bank and SBI. The central bank would like the holding company to parent the bank, on the one hand, and the other business groups, on the other. The holding company is simply an investment group, the RBI avers; its position at the top, in contrast to the middle as envisioned by ICICI Bank, would allow the apex bank to regulate its constituent-bank more effectively.

Many banks will surely contest this on the grounds that existing laws do allow for regulation of an intermediary holding company. But in its concern for regulation, the RBI discounts the ambition in Indian banks to think big. The model for the holding company on top may render growth beyond a certain scale almost impossible, for the nationalised banks in particular. The RBI version suggests that the bank-as-child create its own father — the holding company — or wait for North Block to act. As the majority owner, will the government create a holding entity for each ambitious bank or an omnibus company for all banks or morph into a holding company itself? These are issues that widen the context of the holding company beyond regulation to the more potent one of growth. The RBI’s views virtually condemn Indian banks to their current scale of business. But they also flag off the next stage of urgent reforms to enable the banks mark their footprint in the global financial system. By that token, the debate itself must move beyond Mint Street.

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