Milestone Of Sorts

The working group constituted by the Reserve Bank of India (RBI) on the introduction of financial holding company (FHC) structure in India has come up with its recommendations in a report. In India, all non-banking activities, such as insurance, mutual funds and broking, are undertaken by banks through a subsidiary route. Banks usually float separate subsidiaries to manage these businesses. The working group in its report says: “One of the key risks posed by the bank-subsidiary model is that the parent bank is directly exposed to the functioning of various subsidiaries and any losses incurred by the subsidiaries inevitably impact the bank’s balance sheet. It, therefore, becomes imperative that the bank regulator [RBI in this case] has an interest in the health of all subsidiaries under the banks, even as each subsidiary is under the jurisdiction of the respective sectoral regulators (IRDA, Sebi, and so on)”. This increases the complexity of the supervision process. The working group felt that the FHC structure may enable better supervision from a systemic perspective. The report states: “A holding company model would provide the requisite differentiation in regulatory approach for the holding company vis-a-vis the individual entities.” The working group also suggested that the FHC model can be extended to all large financial groups, irrespective of whether they contain a bank or not. The global economic slowdown saw many banks and financial institutions suffering huge losses and reaching the brink of collapse, which forced many governments to use taxpayers’ money to bail out these institutions in order to safeguard public money. Taking a cue from this crisis, the RBI had constituted a working group in June 2010 to examine the feasibility of introducing an FHC structure in India under the chairpersonship of Shyamala Gopinath, deputy governor, RBI. The group has recommended that the implementation of the FHC model should be done in a gradual and phased manner, which will free up banks from the risk and the extra burden of managing their subsidiaries—these things would be taken care of by the FHC so the bank can concentrate on its own activities. This means that the money lying in your bank account will be more secure in the future.

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