The Hindu Business Line : RBI moots intense supervision of financial conglomerates

THE Reserve Bank of India has proposed to illuminate the complex but largely opaque workings, especially inter-group transactions, of some of the country's largest financial conglomerates.

An inter-regulatory working group of the RBI, SEBI and IRDA today proposed identifying `financial conglomerates' (FCs) and putting them under a special composite regulatory lens.

A group would be designated as a `Financial Conglomerate' if it has significant operations in at least two financial market segments; for example, banking and insurance or insurance and asset management.

Some of the groups that may be asked to step up reporting and find themselves under increased scrutiny are top public sector banks such as State Bank of India, Bank of Baroda and Punjab National Bank and private sector giants such as ICICI Bank and HDFC Bank. Foreign banks such as Citibank and Standard Chartered Bank would also be classified as FCs.

As per the criteria suggested by the working group, even large corporate clusters such as Reliance, Tata, Birla, Bajaj, Kotak, Sundaram and Sahara groups, which have significant presence in the business of finance, would be seen as FCs. NBFCs and merchant bankers such as Merrill Lynch and GE Capital could also be defined as conglomerates.

According to the report, the emergence of multi-segmental groups and associated cross-linkages have generated several supervisory concerns such as the moral hazard associated with the `Too-Big-To-Fail' position of many FCs. They could be vulnerable to contagion or reputation effects on account of the `holding out' phenomenon, especially when sharing the same brand name. There are also worries about opaque intra-group transactions and exposures (ITEs) - both financial and non-financial.

Entities identified as FCs would report to a principal regulator - one of RBI, SEBI, NHB, IRDA, and if the pension fund regulator is set up, that too - that would have the primary responsibility of supervising it. The idea is to capture intra-group transactions and exposures (which are not being captured as of now) within the identified FC and its large exposures to outside counter-parties.

A designated entity within each group would collate data from all other group entities and submit to the principal regulator. A formal mechanism will be set up for inter-regulatory exchange of information.

The report, released for public comment today, says that ITEs could result in capital or income being inappropriately transferred from the regulated entity or on such terms or circumstances that parties operating at arm's length would not allow. Such transactions can adversely affect the solvency, liquidity and profitability of individual entities within a group. ITEs are also sometimes used as a means of supervisory arbitrage, thereby evading capital or other regulatory requirements altogether, it says.

The intra-group transactions between group entities within a financial conglomerate may significantly impact on the financial performance and capital adequacy position of the individual entities involved.

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