Indian Banks’ Association (IBA), the umbrella organization of banks in India, has drafted a response to the Reserve Bank of India’s discussion paper on banks forming holding companies to own their insurance and asset management business.
Although there were some differences among member banks who felt that the central bank is “policing” and others who felt that the central bank must continue “a strict vigil” on banks, the members arrived at a decision on Thursday to support the creation of an intermediate holding company.
A senior banker in attendance at the meeting, who spoke on condition of anonymity, said members were initially divided on the issue of support for creation of a holding company.
However, a decision was arrived at for the benefit of all banks that have huge capital requirements to support their non-banking businesses such as insurance.
In a document posted on its website on Friday, the IBA said that the creation of an intermediate holding company is a pressing need. The creation of an intermediate holding company has been recommended by IBA as an interim measure. The structure can meet the capital needs of banks until the legal and regulatory framework is amended for the creation of bank holding or financial holding companies.
IBA deems the creation of an intermediate holding company “critical” in the context of public sector banks, not only to meet banking needs but also to maintain enough risk management capital under the soon-to-come Basel II standards, without diluting the government holding below 51%.
A chief of a large Mumbai- based public sector bank said the job of raising capital is far more difficult for a public sector bank because the government must remain as the majority shareholder.
On the other hand, he said his bank was trying to raise profitability by increasing the fee income pie, which arises out of businesses such as insurance and asset management. The creation of a holding company, he said, will facilitate the capital-raising process for public sector banks in particular.
Addressing the concerns of the central bank on the difficulty in regulating the ‘multi-layered structure of the holding companies,’ the IBA suggests that an intermediate holding company may be “regulated as any other non-banking finance company.”
IBA said intermediate or step-down subsidiaries currently exist in corporate and bank groups in India and are regulated by the existing framework of the central bank.