The government appears to have endorsed State Bank of India?s (SBI) plan to set up a financial holding company. The holding company will help SBI to raise capital, which can then be used for expanding subsidiary businesses. ?The holding company model would help SBI infuse capital into business areas such as private equity, reinsurance, mezzanine financing and credit enhancement,? an SBI board member told FE. The bank can also pump in funds into its insurance business.
R Gopalan, secretary, department of financial services, finance ministry said “The government would take a call on the matter after the Reserve Bank of India (RBI) releases its discussion paper on holding companies in the banking sector.” Government is the largest shareholder in SBI, controlling 59.4% stake. Another government official, familiar with the matter, said the ministry of finance and the RBI are not averse to a financial holding company structure even though finer details and regulatory changes will have to be fleshed out.
In a discussion paper on the subject in August 2007, the RBI has preferred a financial holding company model over an intermediate holding company model, as the latter is seen as less transparent and difficult to regulate. The central bank had then struck down proposals from SBI and ICICI Bank to set up intermediate holding companies. The RBI is now expected to unveil a fresh paper.
?The biggest problem with banks currently is that they cannot pump in money into subsidiaries, as such funding becomes an obligation of the bank,? said G Ramachandran, head, global research group, ICICI Bank. It is difficult to convince the existing shareholders who want dividend or return on the capital, but non-banking business such as insurance do not yield returns in initial years, he said. ?A holding company can raise funds on its own and direct them to subsidiaries. It can provide parental care,? Ramachandran said By keeping its holding company fully capitalised, SBI can infuse funds into its subsidiary companies.
The business of the parent bank spans across insurance, mutual funds, pension, treasury trading, broking, venture investment, among others. Another advantage is that the subsidiaries do not face any restriction of diluting the government?s equity in them.
In SBI, the government is required to maintain a minimum of 55% stake. The SBI Amendment Bill, 2010, which was recently passed by both Houses of Parliament, enables the government stake to fall to 51% in the bank. SBI also plans to raise Rs 20,000 crore via rights issue by March 2011. Gopalan said the government is studying various capital raising options for SBI. The bank posted a 25% jump in Q1 net profit at Rs 2,914.2 crore, with 88 basis points quarter-on-quarter rise in its net interest margin. SBI stock ended up 0.12% at Rs 3,144.30 on the BSE on Friday.