Mumbai, 14 September The Indian Banks’ Association (IBA) today asked Reserve Bank to allow home-grown banks to set up intermediate holding companies for raising capital for their insurance, asset management and allied businesses.
Responding to the RBI’s discussion paper on the issue, the IBA said this could be an interim solution until ideal conditions are created for banks to set up financial holding and bank holding companies.
These intermediate holding companies could be set up only with the prior approval of the RBI and regulated as any other non-banking finance company (NBFC), the IBA suggested.
It also said that the apex bank can stipulate such conditions that it considered appropriate while granting approval for forming such intermediate holding companies.
This would help create a framework for the regulation of the intermediate holding company, the IBA said.
With an intermediate holding company to take care of the capital needs of non-banking businesses, the parent company would not need to approach the market for raising capital for its non-banking entities frequently and thereby risk its balance-sheet, the IBA contended.
The interim solution has been suggested as creation of financial holding companies (FHC) and bank holding companies (BHC) structures were not possible at one go, and also because it would be time consuming different jurisdictions would result in weak control, the IBA said that all entities in a group, including existing banking and non-banking entities and the intermediate holding company, would be subject to regulation by their respective regulators as well as by the principal regulator under the financial conglomerate supervision regime.
“It is therefore believed that significant additional complexity (in regulation) would not arise on account of an intermediate holding company structure,” it said.
The IBA has also suggested a stipulation of minimum net- owned fund requirements at the intermediate holding company level to ensure that it did not unduly leverage its capital base to invest in the equity of the non-banking subsidiaries and appropriate net capital was maintained on a group-wide basis.
While the RBI paper pointed out that intermediate holding companies would only partially insulate banks from the capital burden of the subsidiaries, the IBA said that such a structure would insulate banks to a large extent from future capital requirements for other businesses.
Intermediate holding companies would be able to raise capital independent of the bank and this would be an improvement upon the current situation, the IBA said.
On the RBI’s concern about lack of clarity regarding exemption in respect of indirect foreign ownership in sudsidiaries, the IBA said the authorities could clarify their position on foreign ownership and it “need not be a pre-condition for permitting intermediate holding company structures.”