Reserve Bank of India: The central bank's proposal to have holding company (holdco) model for banks is expected to increase efficiency but some issues need clarity.
Nearly 8 years after mooting the idea for having a holding company model or holdco model for banking sector, the Reserve Bank of India has started the consultation process with the banks. According to economists, the holding company (holdco) model will help large groups to have transparent and efficient system that will also help contain rising bad loans or non-performing assets (NPAs) in the banking sector. Charan Singh, a former banker and CEO of Noida based economic think tank EGROW Foundation spoke to Financial Express Online’s Krishnanand Tripathi abut the benefits and risks of the proposed model. Edited Excerpts:
Q: RBI has begun consultation process with the banks for moving to holding company (holdco) model. Your views on it?
A: RBI has been considering this proposal since 2011. This is internationally recognised practise and with the country becoming advanced and financial markets developing it would be helpful to have a holding company.
A holding company can have its shares in both banking and non-banking company. In that sense it provides specialised expertise of experienced management to two different activities, banking and non-banking financial services. A similar model to the proposed bank holding model called financial holding model has been adopted by advance economies like the USA, UK, Japan and Canada.
Q: What are the benefits of shifting to holding company model for banks?
A: The proposed bank holding company model will help banks to focus exclusively on banking services and not to worry about other activities like insurance, mutual funds and housing finance or other asset management business. The holding company can result in economies of scale, improved innovation in product and services and seamless movement within the sectors, given the same management between products, services as well as regions.
Q. In what way it will help banks to deal with rising NPAs?
A: The focused attention on banking activities will certainly help in containing the bad loans or non-performing assets (NPAs) of banks. The banks will focus on commercial viability of each project and therefore is expected that NPAs will be reduced.
Q. Whether it will also help improve liquidity situation or the overall efficiency of banks?
A: Given the experience in other advanced economies, this will certainly improve efficiency in the banking system with added focus. In view of the clear segregation of activities, planning, forecast and estimation of liquidity would be more scientific, and therefore easier to address. The holding company will lead to more accountability of different entities.
Q: Are there any risks or regulatory issues involved in the proposed model?
A: There are concerns as to who will be the Holding Companies and if they are working in different sectors like conglomerates then who would be regulating and supervising the Holding Company. Then there are other concerns like in case of Public Sector Banks (PSBs), how will the holding companies operate. Secondly, government banks undertake substantial social obligations and the distribution of activities by the holding company into different sectors and the participation of holding company in each of these second layer institutions would need to be examined.
Another issue that the government or regulator will have to decide about the activities that can be undertaken by the holding companies. There is a possibility that these proposed holding companies may wander into activities which the regulator or Government may not be comfortable with. Therefore there is a need to clearly define the activities to be covered under the proposed model.
There may also be a need to clearly demarcate cross-holdings between different Holding Companies. The another aspect that one should keep in mind that whether these foreign Holding Companies will be allowed to operate or own entitites in India and if it is permitted then to operate entities in India and if so, to what extent?
Interestingly, in early seventies the worry was that banking institutions should not be in the clutches of industry. Consequently, efforts were made to keep the two distinct.