RBI should send suggestions on FHC model to FSLRC: Experts

Banks should not own mutual funds or insurance companies as subsidiaries. Instead, an RBI panel has recommended that financial conglomerates be structured so that a holding company is created with 3 distinct arms - the bank, the insurance company, and the mutual fund. CNBC-TV18’s Latha Venkatesh and Gopika Gopakumar report that while experts welcome this proposal; they disagree on who should regulate the holding company. Recent suggestions to convert financial conglomerates to holding company structures have received kudos from the industry. Experts feel this move will help in regulating them better. JR Verma, professor at IIM Ahmedabad, said, “What the FHC model does is that each of companies, which are running an insurance business or asset management business or a banking business, each of them is separate. They are not in a parent subsidiary relationship to each other. They are all subsidiaries of the same parent. So that really allows you to resolve a conglomerate very easily.” On the other hand, AK Purwar, former chairman of SBI, said, “As far as banking space is concerned, it is extremely well regulated. If you ask the insurance space, again it is regulated; mutual fund is again well-regulated. But if you ask me that anybody is regulating the conglomerate today, I think there is huge gap there.” Experts are divided over who should regulate these holding companies. The report suggests that the RBI be the chosen one and some agree. “If you see the present set of regulators, perhaps RBI, because of his history, because of its very long track record, because very eminent people who are getting into RBI and managing it, it has a very good credentials to look at this as an aggregate,” added Purwar. Narayanan, former secretary, Finance Ministry, said, “Only Finance Ministry will be in a position to be able to bring in people from all the other regulatory to sit together and to sort out the problem.” Hence, to prevent the report from gathering dust, experts say RBI should send these recommendations to the financial sector legislative reforms commission (FSLRC), which is looking to redraft laws governing the financial sector.