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A week ago an RBI panel put out a report recommending restructuring all financial conglomerates as holding companies, such that, the banking entity is a subsidiary of the holding company and the banking company is specifically not the owner of other group companies like the insurance entity, mutual fund entity and the NBFC entity. Two purposes were cited for this choice. 1) It will prevent any problems with say the insurance company or the mutual fund from falling on the bank. 2) It may enable easier capital raising by the holding company for the various entities. CNBC-TV18's Latha Venkatesh caught up Dr J R Varma, professor at IIM Ahmadabad; AK Pruwar former chairman and managing director of SBI and Dr Narayan, former finance secretary to discuss the recommendations made by this working group.
Below is a verbatim transcript of the interview.
Q: Let me begin with someone who is perhaps a little outside to the system and looks at things as an academic, Dr Varma, your first thoughts on the report. Do you agree that, aside from all the tax issues and the problems you will have with bringing public sector banks into this kind of a model, is the financial holding structure model itself a good idea?
Varma: I certainly think it is a good idea that when we have these financial conglomerates and anyway they all operate under separate subsidiaries. If you make each of the operating subsidiaries, a separate subsidiary of a non operating holding company, that makes life much easier. If we ever get to a point where you need a resolution of the conglomerate — if the conglomerates is in trouble and it needs to be resolved — then what you can do in the financial holding company model, is that you can resolve just those operating subsidiaries, which are failing and you can leave the rest of the subsidiaries intact. That is something that you cannot do when the operating subsidiaries are themselves the ones, which own the others. So if it’s the banks, which owns everything else, then you cannot actually resolve the bank and leave the others intact because it is the parent company itself, which has to be resolved. 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. What the crisis has shown is that the biggest conglomerates can get to a point where they need to be resolved and this whole idea that every big financial conglomerate needs is funeral plan, that I think is very important and the FHC model is well suited for that.
Q: Dr Narayan, your first thoughts.
Narayan: I think two or three thoughts. First is certainly structurally there are certain advantages to the FMC model because it separates these three or four or several kinds of activities and prevents the damage from one from spilling on to the other. So, structurally it is very neat. It looks nice. I am a little curious as to why this model all of a sudden has been suggested. There has been some decision at the Government of India level that such a model is good for India. I am not able to access why such a policy decision has been taken because we have been consistently been saying that the damages, which happened in Europe and in the USA are not the kind of damages, which happened here. We did not have those kinds of products. We did not have those kinds of investment and so therefore why are we adopting a solution which is perhaps relevant to those countries.
Q: One point on which I can certainly set your mind at rest: there is no policy decision taken by the Government of India. This is very much a Reserve Bank of India initiative asking one of its own members to chart out a model whereby there would be financial holding company. So if anyone has made up its mind, it’s the RBI. It’s certainly not the Government of India and if I go by initial responses, the government, even if it has not distanced itself has not been very gung-ho about this report or has shown any keenness to implement it.
Narayan: In that case, I would perhaps worry a little more because in that case what the RBI is saying is, “I am not very comfortable with the kind of regulations that exists in mutual funds space and the kind of regulations that exists in the insurance space. I am particularly responsible for the banking space and therefore this particular model will make sure that the banking space is not damaged whatever happens to the insurance and mutual funds space.” If this is what is done, I will be worry a bit.
Q: Dr Narayan if you read the recommendations you won’t get that feeling for the simple reason that the Reserve Bank wants to be the regulator of the conglomerate or the holding company entity but it wants that department that wants the conglomerate to be drawn from people from the SEBI and the IRDA and other regulators. Also, it says that there should be a memorandum of understanding between that department of the RBI and the various regulators. It also says that in case, say for instance a problem with a NBFC or with a mutual fund or with an insurance regulator, the primary regulator shall have a bigger role. So it seems to be respecting the other regulators a great deal.
Narayan: Let us look at our own practical experience in inter-regulator corporation and inter-regulator decisions about I would say border problems and I think it has been fairly poor in the past. Particularly, in the financial sector it has been poor and that is why the Finance Minister has had to form this committee.
Q: I take your point in terms of recent history but I am only wondering if the report is casting aspersions on the quality of other regulators. I don’t see anything. On the contrary, in fact, there seems to be a decent amount of regard, levy and space given to other regulators. Let’s get to Dr Purwar and ask him what he has made. Do you think in the first place that this is efficient? After all you are the one person in this group who has run a conglomerate. Do you think this will be a better idea? Would you have been better placed to run the conglomerate in this fashion?
Purwar: If you ask me, having run State Bank of India and having worked there, what I have found is, 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. Nobody is looking at the conglomerate in total. I think in that regard perhaps this report would brings out some important issues.
Q: It is SBI, the bank, which is providing the capital to the insurer and to the mutual fund. While at the moment that’s not a very onerous responsibility SBI Life is also a hugely growing organisation. The government is not desirous of having 75% ownership over the insurance entity. It wants to make sure that it has 51% over the bank. So won’t it make it efficient or easy for the government — and the report argues that in great detail in how to recast the model — would it not be easy for it to only have to raise capital for the bank? It won’t have to raise capital for the insurance company which will be done by public share holding.
Purwar: Again, I would draw from my State Bank of India balance sheet, whatever capital is required is provided by the bank for the life insurance arm. Bank’s capital funding gets aggregated, but as far as inter allocation of capital for these entities are concerned, it’s not very substantial. It’s very marginal. Most of these entities are owned 100% by SBI. They are yet to be listed in the market. Once you get this listed you can raise huge amount of capital from the market, particularly in SBI Life, which has created huge value, very significant amount of capital can be raised from the market. So there is no dependence as far as the capital raising is concerned with the government. So that’s not an issue at all.
