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    RBI's Feint: Share Print T+ T+ T

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    RBI's Feint: Share Print T+ T+ T

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    RBI

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    RBI's Feint: Share Print T+ T+ T

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    nkmmpl.98

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    RBI's feint

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    The RBI Working Group on Financial Holding Companies (FHC) has recommended that all
    large financial sector companies should adopt a holding company structure. It has recommended
    new legislation for this. Currently, the system in India is the bank subsidiary model, under which
    a bank uses subsidiaries to pursue non-banking activities. Banks have done so not just because
    they need growth and but also because they believe they must diversify their income sources.
    Thus they are now into insurance, mutual funds, investment banking, brokerages and asset
    recovery, among others, via the subsidiary route. But here lies the rub. Once these subsidiaries
    begin growing and start acquiring a disproportionate size (emerging as conglomerates), there is a
    fear that they will begin to pose systemic risks. With complex structures and shareholding
    patterns, these companies often represent examples of chaotic governance and a violation of the
    simple management principles of having clear-cut lines of authority and responsibility. All too
    soon, they become ‘too big to fail,' which makes the regulator's task of monitoring and
    supervision extremely difficult. The RBI experiences considerable discomfort about the
    reputation risk — real and perceived — that the parent bank is assuming on itself. There is also a
    moral hazard problem because those dealing with a bank's subsidiaries think they get the benefit
    of the safety net, deposit insurance, access to central bank liquidity, etc. To solve these problems
    the Working Group wants to limit the growth of the subsidiaries so that non-banking activities
    don't tend to dominate the banking operations.

    But who will decide this limit and who will regulate the holding companies? The Group thinks
    this power should lie with the RBI. But one may well ask: does this now somehow militate
    against the concept of free enterprise and smack of a control raj? Questions such as these are
    bound to result in the suspicion that there may be another agenda — of retaining control. If
    accepted, the change would help the RBI win the turf war that has been going on for some time
    among the regulators of other segments in the financial sector. The Group, however, notes,
    perhaps a bit too carefully, that the new regulator for FHC should not be seen as a ‘super
    regulator' but as a supplementary regulator. Sceptics will snigger, even though this will allow
    undiluted focus on systemically important companies.

    It must be asked whether the recommendations resolve the core issue of multiple regulators and
    multiple regulations. The short answer is no. With 10 out of 13 members representing the
    banking sector or the RBI, its bias is obvious and its recommendations on this score lack the
    force of a more balanced, representative and neutral committee.

    The recommendations on financial holding companies might have been more credible had the
    panel been more representative and neutral.

    (This article was published in the Business Line print edition dated May 25, 2011)

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