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Our Bureau

Mumbai, Aug. 27 The proposals of ICICI Bank and State Bank of India to float holding companies for their insurance and asset management business may face regulatory hurdles, going by the Reserve Bank of India’s views expressed in a discussion paper on holding companies released on Monday.

According to the discussion paper, the intermediate holding company model (which is being proposed by both the banks) will not come under the RBI’s regulatory supervisions as they are not required to be registered as non-baking finance companies.

In the case of ICICI, its application for creating a holding company — ICICI Financial Services — is pending with RBI, though it has already been cleared by IRDA, FIPB, and the Ministry of Finance.

According to the RBI, since an intermediate holding company does not offer financial services, it would not come under its regulatory purview as a non-banking finance company and hence be an unregulated entity.

While the bank will be able to avoid the current 20 per cent regulatory limit on investment in the financial services companies, the RBI may also have difficulty in obtaining crucial information from the intermediary holding company and enforcing any prudential behaviour required.

The discussion paper said, “In bank subsidiary conglomerate model which is presently being followed in India, the intermediate holding companies, especially those combining non-banking subsidiaries/associates of the parent bank, will pose specific difficulties.”

For instance, there can be an intermediate holding company under the parent bank, which combines for subsidiaries engaged in insurance, asset management, stock broking, and housing finance activities.

“While all these subsidiaries will be regulated by different regulators (IRDA, SEBI and NHB) on a solo basis, as the parent is a bank, the overall supervisory responsibility for the entire group including that for the subsidiaries of the intermediate holding company will rest with the RBI,” said the paper.

The RBI is not in favour of a multi-layered structure and would rather have a structure where the holding company is at the peak and the bank, insurance and asset management companies are its subsidiaries.

This would ensure that all the subsidiaries have separate balance sheets.

The RBI believes that in such a case banks would be much better protected from the possible adverse effects of the activities of their non-banking financial subsidiaries.

The discussion paper suggests that such non-banking subsidiaries may in fact be allowed to undertake riskier activities such as commodity broking if they are part of such a simpler structure where there is no intermediate holding company.

The banking regulator is also concerned that the ‘overextension of the bank group’ may be a threat to the bank’s strength.

The bank, for instance, may have to step in to raise capital if the intermediate company is unable to do so, which may in turn put the bank’s balance sheet under pressure.

The paper also suggests the need for a proper legal framework for ensuring no unregulated entity is present within the structure.

According to bankers, the intermediate holding company model would come under the regulations pertaining to NBFCs and hence RBI would be empowered to regulate.

More Stories on : Banking | Restructuring | Private Banks | Public Sector Banks | ICICI Bank Ltd | State Bank of India

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