The Reserve Bank of India (RBI), in a discussion paper released on Monday, said the overall supervisory responsibility for holding companies floated by banks to oversee insurance and asset management operations should lie with the banking regulator itself. This is in line with existing US practice.
This implies that sectoral regulators like the Insurance Regulatory & Development Authority, Securities & Exchange Board of India and National Housing Bank, under whose jurisdiction subsidiaries of the bank?s intermediate holding company may fall, will play second fiddle to RBI.
It may be recalled that ICICI Bank and State Bank of India have both proposed setting up holding companies for their asset management and insurance businesses. The RBI discussion paper adds a new twist to these efforts.
The central bank says it is time to set new standards according to international norms. ?The idea is to avoid the problems being faced by the USA and other countries due to excessive complexity and too much customisation of products by their banks. The ongoing US subprime loan crisis can just be an example for this,? the discussion paper states. RBI has given three weeks? time for suggestions from the public to its proposals.
The discussion paper has favoured the US model, wherein bank holding companies (BHCs) own or control one or more banks. The paper has stressed that the only difference is that BHCs in some US jurisdictions are unregulated, whereas they should be regulated by law in India. In the US, the Federal Reserve regulates these BHCs.
On the other hand, the financial holding company (FHC) is another model which is in vogue internationally, wherein companies own or control one or more banks or non-bank financial companies. Therefore, the discussion paper emphasises the need to have separate legislation to regulate BHCs/FHCs.
The RBI suggested amending the Banking Regulation Act, 1949, in case only the BHC model is adopted. The capital adequacy framework would be governed under Basel-II.