IMF says India
shouldn’t rush to give banking licences to conglomerates
IMF says India
needs to improve its financial system supervision and crisis preparedness
First Published: Wed, Jan
16 2013. 08 31 AM IST live mint
IMF said
Updated: Thu, Jan 17 2013. 12 10 AM IST
IMF’s Financial System Stability Assessment Update said it
would be prudent for India
to first put in place and gain sufficient experience in implementing a
comprehensive framework for the purpose before considering the entry of
conglomerates into banking.
“The legal, operational and regulatory framework for
consolidated supervision of both bank-led groups and financial conglomerates is
still missing some important elements,” it said, while also flagging concerns
about the lack of total independence for the Reserve Bank of India (RBI) from
government influence.
This warning precedes the expected release of the final set
of bank licensing guidelines by RBI later this month, expected to kick-start
the process of new private sector entities getting licences to open commercial
banks.
Last month, Parliament passed the Banking Laws (Amendment)
Bill, 2011, empowering the central bank to supersede bank boards and scrutinize
associate companies of bank promoters. The passage of the Bill had been a key
precondition set by RBI to start issuing new bank licences.
RBI had been reluctant to give banking licences to companies
that could use the lender’s funds for the benefit of other group units and deny
funds to rivals, and had sought the power to supersede boards of potential
rogue banks.
International experience supports disallowing industrial
houses from promoting and owning banks, IMF said.
“Consolidated supervision frameworks and capabilities are
weak even for bank-led groups in the majority of jurisdictions assessed...and
frameworks for the oversight of financial conglomerates continue to be a ‘work
in progress’ at the international level,” it said.
A senior finance ministry official said sufficient
safeguards would be put in place to ensure that the new banks don’t lend to
group companies.
“The new banks will not be allowed to lend to group
companies. Because of this, we have written to the Reserve Bank of India that even
companies with exposure to real estate and stock broking could also be
considered,” the official said on condition of anonymity.
The ministry expressed its views to RBI ahead of the
regulator issuing final guidelines for new bank licences. The central bank,
however, in the first round of granting licences may favour non-banking
financial companies rather than large industrial conglomerates.
“There are serious areas of concern with family-controlled
banks. The managerial team will have ‘high-powered incentives’ that come with
high shareholding. Their super-incentivized staff will be energetic in dodging
regulation; our financial regulatory agencies will not be able to rein them
in,” said Ajay Shah,
a professor at the National Institute of Public Finance and Policy.
“There is tension between the need for greater competition
in banking and the entry of family-controlled banks. Luckily, there are two
pathways through which we can avoid these complexities,” he said. “The first is
to have entry by dispersed-shareholding banks, controlled by no family, and the
second is to have entry by foreign banks.”
IMF’s concern also stems from the fact that several legal
provisions, including those in the Banking Regulation Act, limit the
independence of the central bank.
“Some legal provisions in the Banking Regulation Act allow
the central government to give directions to RBI, require RBI to perform an
inspection, overrule RBI’s decisions, and supersede the RBI central board,” the
report pointed out. “Removing these provisions and specifying in law the
reasons for removal of the head of the central bank during his/her term would
provide greater legal certainty regarding RBI independence.”
On the question of autonomy of Indian regulators, RBI said
financial sector regulators in India
operate within statutory frameworks that “prudently balance the role of
government in policymaking with autonomy and independence for regulatory bodies
to transparently perform regulatory functions through exercise of statutory
powers”.
“The de facto position, too, reveals no interference in the
functioning of regulators. Steps are underway to accord a statutory basis to
the pension regulator also,” RBI said in a statement on Wednesday.
The IMF report cited gaps in prudential regulation,
including the large exposures and related-party lending regime in banks, and
valuation and solvency requirements in insurance.
“The combination of a sharp credit expansion and a more
recent economic slowdown is putting pressure on banks’ asset quality,
especially for infrastructure and priority sector lending. Group concentrations
have reached troubling levels at some banks,” IMF said.
The central bank, while agreeing that the group borrower
limit in India
was higher than international norms, said keeping the group borrower limit at
the level of the single borrower limit would severely constrain the
availability of bank finance. This would hamper the growth of the economy as
major corporate groups are key drivers of growth, RBI said.
The current exposure limit is a maximum of 55% of a banking
group’s capital against 10-25% followed internationally.
IMF, in its report, pointed out that although India ’s
oversight regime for banks, insurance and securities markets was largely in
compliance with international standards, some gaps remain.
“A common issue across the sectors is the lack of de jure
independence, which can be rendered more challenging by the intricate
relationship with state-owned supervised entities and their business decisions.
A framework for consolidated supervision of financial conglomerates is still
being developed,” IMF said in its report.
RBI said the central bank had made efforts to establish
information-sharing mechanisms with various jurisdictions in which Indian banks
were operating. “With regard to the information sharing and coordination among
domestic regulatory authorities, it may be noted that the FSDC, under the
chairmanship of finance minister, provides for effective regulatory
coordination,” it said.
FSDC is short for Financial Stability and Development
Council, a panel of financial regulators headed by the finance minister.
IMF also expressed concern on the multiple roles of RBI,
which may be conflicting. “RBI officers are nominated as directors on the
boards of public banks, while at the same time RBI serves as the prudential
supervisor of these banks. It would be preferable for the government to focus
on policies that ensure the appointment of well-qualified, independent board
members that are not from RBI,” the report said.
The central bank admitted that there could be “moral hazard”
issues and said it had taken up the matter with the government for amendment of
the enabling legal provisions.
IMF also pointed out that the government needs to look for
ways to manage its ownership so that public banks can meet the needs of a
growing economy.
“RBI should ensure that a conflict be avoided and policies
decided in accordance with that. But most of the observations of IMF are
exaggerated,” said Bimal Jalan,
a former governor of RBI. “India
is absolutely on the right track and a number of policies that we are following
like a flexible, but managed exchange rate are being adopted by other
countries.”
Why India
should heed the IMF warning on corporate banks
The Indian experience with corporate ownership of banks has
been a messy affair in the past
First Published: Wed, Jan
16 2013. 01 45 PM IST
Updated: Wed, Jan 16 2013. 04 30 PM IST
In its latest update on financial stability in India , the International Monetary Fund (IMF) has
warned against granting bank licences to industrial houses in India . The
Fund’s warning follows that of Nobel-winning economist Joseph
Stiglitz, who spoke against corporate ownership of banks in his
recent visit to India .
Amidst a growing clamour by business groups to liberalize
bank ownership norms, such warnings should prompt a rethink on whether the
risks to financial stability from allowing corporate ownership of banks
outweigh the benefits.
IMF thinks the risks outweigh the benefits currently and
says so quite bluntly:
“…the legal, operational, and regulatory framework for
consolidated supervision of both bank led groups and financial conglomerates is
still missing some important elements, and it would be prudent to first put in
place and gain sufficient experience from implementing a comprehensive
framework for this purpose before even considering whether to proceed with the
entry of mixed groups and conglomerates.”
Concerns about perverse inter-group lending and risks of
contagion cannot be dismissed lightly. While more banks will promote
competitiveness and might even lead to greater financial inclusion, it is
worthwhile to ponder if there are less risky ways to achieve these noble aims.
Recent financial history shows that the road to hell is often paved with good
intentions. Even sub-prime mortgages were justified in the US on the grounds of greater inclusion—policy
makers in the US
wanted more poor people to own homes. The risks were never acknowledged till
the sub-prime crisis erupted.
The Indian experience with corporate ownership of banks has
been a messy affair in the past. The international experience too has not been
very bright, as the IMF points out. The IMF would know. Some of the biggest
disasters arising from corporate ownership of banks occurred in Latin American
economies, which were following policies laid down by a more aggressive Fund
during its heydays in the seventies and eighties. Most developed markets have
had stringent restrictions on bank ownership norms since long. Economies such
as Japan ,
where banks had an incestuous affair with corporate groups, paid a heavy price
for it.
Government may use National Investment Fund to recapitalise state-owned banks
It is expected that the fund will be brought under the Consolidated Fund of India.
Currently, funds generated from disinvestment of public sector companies go to NIF and are used for financing select social sector schemes and meeting capital investment needs of profitable as well as revivable state firms.
According to sources, the Cabinet will consider aligning NIF operations at its meeting to be held tomorrow. NIF, set up in 2005, is currently managed by three fund managers -- UTI Asset Management Company Ltd, SBI Funds Management Company (Pvt) Ltd and LIC Mutual Fund Asset Management Company Ltd.
As much as 75 per cent of the income from NIF is used to finance selected social sector schemes, while the rest is utilised to meet the capital investment requirements of profitable and revivable central PSU.
However, because of the difficult economic situation caused by global slowdown, the government in November 2009 decided to utilise proceeds from disinvestment only for social sector spending.
This exemption is applicable till March this year.
Since April 2009, disinvestment proceeds are being routed through NIF to be used in full for funding capital expenditure under the social sector programmes such as Mahatma Gandhi National Rural Employment Guarantee Scheme, Indira Awas Yojana and Rajiv Gandhi Gramin Vidyutikaran Yojana.
Finance Ministry requests RBI for relaxing capital adequacy norms
Press Trust of India | Updated On: January 16,
2013 18:49 (IST)
"RBI is fully seized of the matter and we have also requested it to look into the issue. We are in conversation with them," said an official source.
RBI deferred the implementation of Basel III, the global capital norms for banks, by three months to April 1.
The deadline for the full implementation of the stiff liquidity norms or liquidity coverage ratio (LCR) for banks, which were to kick in from 2015, has been extended till 2019.
Earlier this month, oversight panel Group of Governors and Heads of Supervision (GHOS), which includes representation from
The Committee, a grouping of top regulators and central bankers, had mooted the stiff liquidity requirements for banks to ring fence as well as prevent financial disruptions.
A major component of the Basel III banking norms, LCR aims to ensure that a bank has an adequate stock of unencumbered high quality liquid assets to meet liquidity needs for a month's stress scenario.
The LCR would be introduced as planned on January 1, 2015, but the minimum requirement would be 60 per cent. The same would be increased by 10 percentage points in the subsequent years to reach 100 per cent on January 1, 2019.
According to GHOS, this graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.
Among others, the panel has approved amendments to LCR rules, including revisions to the definition of high quality liquid assets and net cash outflows.
Centre mulls holding company for PSU banks business standared
 The move comes after
public sector banks submitted their capital requirement plans for the next
eight-10 years, after taking into account the capital requirement under the
new Basel-III framework. The government, which is keen on holding a minimum
stake of 58 per cent in public sector banks, may find it difficult to infuse
large sums of money, as this would affect the country's fiscal position.
Banking industry officials say by forming a holding
company, it would be possible to raise funds from the market, and the
government holding can be maintained at above 58 per cent.
In August, the government had sanctioned capital infusion of around Rs 2,000 crore in some public sector banks, to increase its stake to 58 per cent. It had earmarked Rs 6,000 crore for capital infusion in public sector banks, as announced during the Budget this year. Apart from maintaining 58 per cent stake, the government also wants to ensure public sector banks’ tier-I capital adequacy ratio be at least eight per cent. The regulatory requirement is six per cent, with an overall capital adequacy ratio of nine per cent. The government’s stake in large banks like Union Bank of Banks are expected to grow at 20-25 per cent over the next few years if economic growth stays around the trend growth rate of eight per cent. Bankers said retained profit would not be sufficient to support the capital requirements required to maintain decent growth. |
|||||||||||||||||||||||||||
The move comes after
public sector banks submitted their capital requirement plans for the next
eight-10 years, after taking into account the capital requirement under the new
Basel-III framework. The government, which is keen on holding a minimum stake
of 58 per cent in public sector banks, may find it difficult to infuse large
sums of money, as this would affect the country's fiscal position.
Banking industry officials say by forming a holding
company, it would be possible to raise funds from the market, and the
government holding can be maintained at above 58 per cent.
HOLDING ON
Govt stake in some major public sector banks: |
|
State
Bank of India
|
59.40
|
Corporation
Bank
|
58.52
|
Dena
Bank
|
58.01
|
Allahabad
Bank
|
58.00
|
Andhra
Bank
|
58.00
|
Oriental
Bank
|
58.00
|
Punjab
National Bank
|
58.00
|
Vijaya
Bank
|
57.69
|
Union
Bank of
|
57.07
|
Bank
of
|
57.03
|
Source:
Capitaline
Compiled by BS Research Bureau |
|
In August, the government had sanctioned capital infusion of around Rs 2,000 crore in some public sector banks, to increase its stake to 58 per cent. It had earmarked Rs 6,000 crore for capital infusion in public sector banks, as announced during the Budget this year.
Apart from maintaining 58 per cent stake, the government also wants to ensure public sector banks’ tier-I capital adequacy ratio be at least eight per cent. The regulatory requirement is six per cent, with an overall capital adequacy ratio of nine per cent.
The government’s stake in large banks like Union Bank of
Banks are expected to grow at 20-25 per cent over the next few years if economic growth stays around the trend growth rate of eight per cent. Bankers said retained profit would not be sufficient to support the capital requirements required to maintain decent growth.
Indian Banks’ Association
RBI
Discussion Paper on Holding Companies in Banking Groups
– IBA’s Response on the Discussion Paper
Introduction
The Indian financial sector
has broadened significantly in the last decade with the opening up of the
various segments such as insurance and asset management to new participants,
which in turn has facilitated the growth and penetration of financial services
in the country. This has also necessitated structural changes arising out of
the capital needs of the entities. This has led to the emergence of financial
conglomerates or groups of legal entities that offer a range of financial
services.
Recognizing the possibility
of systemic risks posed by financial conglomerates, the initiation of
discussion by Reserve Bank of India (RBI) on holding companies in banking
groups is welcome. The non-banking financial businesses, particularly
insurance, are expected to require substantial capital to support their growth.
It is therefore necessary to evolve a structure that takes into account the
need to limit the exposure of bank depositors to non-banking risks, while
facilitating the desired increase in penetration of the non-banking businesses,
like insurance, as part of overall financial deepening in India
Ideal regulatory structures and challenges
As stated in the discussion
paper, financial holding company (FHC) and bank holding company (BHC)
structures would be suitable in the Indian context, as banks and their
depositors would be effectively separated from the non-banking financial
businesses in the group. However, this would require examination of the legal
and regulatory changes necessary to facilitate creation, functioning and
regulation of FHCs and BHCs. It may need to be examined as stated in the RBI
paper whether these would require a new statute or may be achieved through
specific amendments to the existing legal and regulatory framework. It is
suggested that it may be possible to constitute and regulate such entities
within the existing legal and regulatory framework, with certain amendments to
extant regulations rather than having a statute in place before allowing any
model to develop. Further, it is difficult to specify only one model in India
Need for intermediate holding companies
While it is not possible to
immediately constitute an FHC or BHC structure, the issue of creating an
appropriate structure for non-banking financial subsidiaries of banking
companies assumes immediate attention given the capital requirements of these
businesses, especially the insurance business. This is critical in the context
of public sector banks, which require capital not only to support the growth of
the banking business and meet the requirements of Basel II but also to meet the
solvency requirements of the rapidly growing insurance businesses, without
diluting the government holding below 51%. The statutory requirement of
majority government ownership in the parent public sector bank reduces its
flexibility in raising capital from the market.
In this context, it would be
beneficial to permit intermediate holding companies in banking groups, as an interim measure pending the move to an FHC or BHC structure as it is
evident that creating an FHC at one go is not possible and it is also time
consuming. Intermediate holding
companies would be formed only with the prior
approval of RBI and would be regulated
by RBI within the extant regulatory framework. Such entities in Indian
banking groups would limit the exposure of the bank and its depositors to the
non-banking businesses, without unduly constraining the non-banking businesses.
Further, the parent company need not have to approach the market for raising
capital for its non-banking entities frequently and thereby risking its balance
sheet if an intermediate holding company is there to take care of the capital
needs of the non-banking businesses.
Concerns relating to Intermediate Holding Companies
The discussion paper has
raised several concerns relating to intermediate holding companies. We give
below some points to substantiate that the intermediate holding company model
can very well be accommodated within the existing legal and regulatory
framework.
a) General Concerns on Regulation
The paper points out that
the multi-layering of corporate structure would impede supervision by bank
regulators. In this context it may be
noted that intermediate or step-down subsidiaries currently exist in corporate
and bank groups in India
The paper expresses concern
that multi-layered structures in different jurisdictions would result in weak
control while increasing size would impose expectation of rescue by regulator
in the event of a crisis. It may be noted that the intermediate holding company
structures currently being proposed by market participants in India envisage an
India-incorporated entity majority-owned by the parent bank and in turn owning
shares in non-banking financial businesses currently owned directly by the
parent bank. All the entities in the group including the existing banking and
non-banking entities and the intermediate holding company would be subject to
regulation by their respective regulators as well as by the principal regulator
under the financial conglomerate
supervision regime. It is therefore believed that significant additional
complexity would not arise on account of an intermediate holding company
structure.
Addressing the Investor’s concern
The paper notes that
investors would have difficulty in risk assessment of conglomerate structures
consisting of intermediate holding companies. It may be noted that various
statutes and capital market regulations mandate the requisite disclosures to
enable investors to make informed decisions. For example, Indian regulations
require preparation of stand-alone and consolidated financial statements of the
parent company and stand-alone financial statements of each subsidiary, direct
or indirect, on an annual basis. The stand-alone and consolidated financial
statements of the parent company must be published and provided to all
shareholders, while the stand-alone financial statements of each subsidiary
must at least be posted on the parent company website and also made physically
available to shareholders on request. Given the competition to attract capital
and the increasing sophistication of institutional investors, transparency
would be an essential pre-requisite for any banking group. It is also suggested
that RBI may stipulate such conditions as it deems appropriate regarding the
activities of such entities and use of capital by them.
Capital Requirements
As rightly mentioned in the
paper, the group-wide capital adequacy technique should be used to eliminate
the effect of intermediate holding companies and ensure that the capital
appropriate for all banking and other financial businesses is indeed maintained
irrespective of the presence or absence of an intermediate holding company.
The paper expresses concern
on the use of leverage by the intermediate holding company to capitalize its
subsidiaries. It is suggested that this may be addressed by stipulating minimum Net Owned Fund
requirements at the intermediate holding company level to ensure that it
does not unduly leverage its capital base to invest in the equity of the
non-banking subsidiaries, and appropriate net capital is maintained on a
group-wide basis.
Regulatory Burden
The paper mentions that
intermediate holding companies would increase regulatory burden and there would
be a need for upgrade in judicial framework and accounting and audit
capabilities. As mentioned earlier, the intermediate holding company structures
currently proposed by market participants in India
De-risking the Parent Bank
The paper points out that
intermediate holding companies would only partially insulate banks from the
capital burden of the subsidiaries. It may be noted that currently, there is no
insulation of banks from the capital burden of their subsidiaries. The
intermediate holding company structure would insulate the banks to a large
extent from the future capital requirements of other businesses as the intermediate
holding companies would be able to raise capital independent of the bank. It
would thus improve upon the current situation. Full insulation of the banks
from the risks of subsidiaries would only occur if and when a migration to the
FHC model takes place.
Concern on “unregulated entities”
The paper expresses concern on the systemic risk posed by
the presence of unregulated entities in banking groups. Based on an analysis of
extant regulations, it is believed that an intermediate holding company in a
banking group would be regulated by RBI. This analysis is set out below:
- Section 45-I of the RBI Act defines the business
of a non-banking financial institution to include the business of
investing in shares, and defines a non-banking finance company (NBFC) to
include a non-banking institution which is a company. Section 45- I A of
the RBI Act mandates all NBFCs to seek registration with RBI. Only certain
types of NBFCs, such as companies in the business of insurance, housing
finance, stock-broking and merchant banking have been exempted from
registration with RBI. Thus, an NBFC engaged in the business of
investment, even if only in-group companies, is required to register with
RBI. Hence an intermediary holding company could be regulated by RBI under
this Section of the Act.
- Under the RBI Master Circular on para-banking
activities, a banking company is required to take RBI’s approval for
forming a subsidiary, which would apply to an intermediate holding
company. At this stage RBI can impose such conditions or stipulations as
it may deem fit and thus create a framework for the regulation of the
intermediate holding company.
- RBI prescribes a regime for supervision of
complex financial conglomerates, which includes capturing of intra-group
transactions and inter-regulatory exchange of information. This regime
even covers non-financial enterprises forming a part of the group. The
proposed intermediate holding company would fall within the ambit of this
framework.
- RBI’s guidelines specifically regulate non-deposit
taking NBFCs with an asset size of Rs. 100 crore or more (categorised as
“systemically important non-deposit taking NBFCs”), including prescribing
a capital adequacy ratio for such NBFCs. Intermediate holding companies in
banking groups would likely fall within this criteria.
The paper
expresses the concern that the intermediate holding companies within the bank
subsidiary model being followed in India
- Banks would continue to
be subject to the limit of 20% of capital and reserves, for all their
investments in non-banking financial entities including the intermediate
holding company and would have to obtain RBI’s approval for any fresh
investment.
- The creation of an
intermediate holding company which can independently raise capital for the
non-banking business would mitigate the risk for the bank and its
depositors. In the absence of such a structure, the bank could continue to
invest in non-banking subsidiaries within the para-banking guideline
limits, by raising capital itself and thereby actually increasing the
exposure of the bank and its depositors to the non-banking business risks.
- There could be a
concern that leveraging of its capital by an intermediate holding company
may have a negative impact on the financial profile of the group. This may
be addressed by stipulating minimum Net Owned Fund requirements at the
intermediate holding company level to ensure that it does not unduly
leverage its capital base to invest in the equity of the non-banking
subsidiaries, and appropriate net capital is maintained on a group-wide
basis.
- There may also be a
concern that risks such as reputation risk may be enhanced due to rapid
growth of the non-banking businesses. It may be noted that each of these
businesses is subject to regulatory supervision and oversight over their
growth and operations. Further, the financial conglomerate supervision
framework also provides a mechanism for regulating inter-related banking
and financial entities, including sharing of information between
regulators.
The paper also
mentions the lack of clarity regarding exemption in respect of indirect foreign
ownership in subsidiaries. It may be noted that:
·
Under current regulations (namely the FDI Policy and related
press notes), 100% FDI is permitted in an investment company in the services
sector; and, unless FDI in such a company is not more than 49% and the
management of the company is with Indian owners, the foreign shareholding in
the company would not be considered for the purpose of determining foreign
shareholding in its investee companies. Any intermediate holding company in a
banking group wherein the bank owns 51% or more would fall within this
criteria, and as such could raise capital from foreign investors without any
impact on the foreign shareholding level permitted at the investee company
level.
·
The regulations governing insurance companies provide that
investment by foreign institutional investors other than the foreign promoter
in the Indian promoter need not be considered in computing foreign ownership in
the Indian insurance company.
Thus, the absence of
exemption referred to in the discussion paper applies only in case of holding
by the foreign partner in an insurance venture, in the intermediate holding
company. In other non-banking businesses such as brokerage and asset
management, 100% foreign ownership is currently permitted. The position on
foreign ownership can be suitably clarified by the concerned authorities, and
need not be a pre-condition for permitting intermediate holding company
structures.
Conclusion
In summary, while the
eventual objective for financial conglomerates in India would be to move
towards FHC or BHC structure, in the interim, intermediate holding company
structures in banking groups would serve to limit the additional capital
investment and resultant risk-bearing by banking entities in non-banking
financial businesses, allowing such businesses to grow as required for overall
financial deepening. Extant regulations require RBI approval for formation of
such an entity and its registration as an NBFC, and empower RBI to stipulate
conditions while granting such approval and registration. Extant regulations
also provide for regulation by RBI of all NBFCs and indeed all entities in a
banking group. Thus, a regulatory framework is already in place to facilitate
the formation of intermediate holding company structures.
Given the fact many banks
have ventured into different non-banking activities and are having subsidiaries
and are seeking ways to raise capital for funding their subsidiaries, the time
is ripe for developing an intermediary financial company to meet the growing
needs of the non-banking activities. In the case of Public Sector Banks,
augmenting the capital is a major area of concern given the 51% cap of the
government holding. Considering all these aspects, it would be worthwhile for
RBI to facilitate growth of home-grown financial conglomerates through
intermediate holding company structure, as an interim solution, pending the
end-state of FHC or BHC model in the system.
*****************
SUUTI may become holding company for PSBs
Dheeraj Tiwari, ET Bureau Jul 16, 2012, 04.02AM IST
The union cabinet has already approved a proposal to wind up SUUTI and shift its assets to a new asset management company.
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