With several public sector banks having approached the finance ministry to set up a holding company, the ministry has shot off a letter to RBI on the subject.
The banks, including Punjab National Bank need the permission soon, as they are keen to expand the range of their operations to take advantage of the opportunities opening up in the financial sector. PNB chairman KC Chakraborty said he was keen to set up a holding company but would have to await a government clearance for it.
While ICICI Bank has already obtained necessary permission, applications of other banks are in a limbo. While the ministry appears to be in favour of a intermediate holding company structure, the RBI has favoured a different structure. ICICI?s plan is to set up an intermediate holding company that would own both its insurance and asset management companies. The advantage of this structure is that it is easy to set up and can be partially hawked in the market to raise capital.
The RBI plan has instead suggested an omnibus holding company where each business is run as a subsidiary of the company. B anking, insurance, mutual fund and other financial activities can be separated into isolated compartments. This way, any losses of one arm will not be reflected in the balance sheet of the others or that of the holding company. In August, RBI had issued a discussion paper on the subject. But an intermediate holding company structure will allows public sector banks to raise funds without diluting the government 51% stake. So the finance ministry is keen to run with it.
The RBI plan would need an amendment of the Banking Regulation Act to permit more than 10% holding by a single entity in a domestic bank. The model would also expenses like stamp duty and registration costs for the banks. Ministry sources said that was a long haul, and so an intermediate structure was a preferable alternative. Local banks with overseas offices have to comply with Basel-II norms by March 2008. The deadline for those with only local operations is later ar March 2009. According to US investment bank Jefferies, Indian banks need over $40 billion of equity funding over the next five years.
?We should not stunt the growth of banking sector waiting for the BHC or FHC legislation to be put in place. In the interregnum, the intermediate holding company structure should be allowed to bring in the necessary capital,? said Indian Banks? Association senior VP and deputy chief executive K Unnikrishnan.