Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banks: The subsidiary conundrum - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 31, 2007

    Banks: The subsidiary conundrum

    The evolution of the banking sector in India has finally reached the stage of getting aligned to its peers in the developed world. And why not! If the regulator's (RBI's) roadmap of allowing foreign players into the sector by FY09 deserves some degree of seriousness, this seems imperative. Following this logic, the Reserve Bank of India (RBI) has proposed a new structure for the holding companies of banks in response to applications made by ICICI Bank and SBI - for setting up intermediary holding companies for their key non-bank operations.

    The regulator has not minced words in expressing its discomfort with regard to creating intermediate holding companies and has suggested exploring the possibility of creating banks or financial holding companies (BHC*/FHC**) on the lines of financial structure operating in the US. Currently a typical bank-centric organisation structure is followed in India (see adjacent chart). However, the proposed structure will involve a multi-layered financial conglomerate and may also have a few tiers of intermediate holding companies apart from the holding company at the top.

    *BHCs are companies that own or control one or more banks. These companies can make only limited investments in the non-banking companies.

    **FHCs are companies that own or control one or more banks or non-bank financial companies. FHCs can engage in activities other than banking as long as they are financial in nature. FHCs control approximately 80% of the entire banking system in USA. Other than USA, Canada, UK, Japan, France and some Asian countries such as Taiwan, Korea, Singapore and Hong Kong also have the FHC as a model of organization.

    The key positive of the proposed structure is that while currently a bank's investment in its financial subsidiaries is limited to 20% of its networth, this restriction will not apply in the BHC/FHC structure. Thus, once the subsidiaries are separated from the banks, the growth of the subsidiaries/associates would not be constrained on account of capital. Further, capital adequacy for the purpose of Basel-II compliance would be applicable to the BHC at consolidated level wherever it qualifies as a 'banking group'. (If more than 50% of the group's assets are banking assets and more than 50% of the income is derived from banking activities).

    The multi-layering of corporate structure is, however, not a favourable proposition from the investors' point of view as they would be ignorant about where the money invested by them will be eventually used in the complex conglomerate, as the rate of return generated would differ between the entities. Thus, it would be difficult for them to assess the true risk involved in their investments.

    Further, while all the subsidiaries will be regulated by different regulators (Insurance Regulatory and Development Authority (IRDA), Securities and Exchange Board of India (SEBI) and NHB) on individual basis, as the parent is a bank, the overall supervisory responsibility for the entire group including that for the subsidiaries of the intermediate holding company will rest with RBI. The entity would therefore attract RBI's regulatory concerns and provisioning requirements thereof. These concerns will be accentuated if the holding company is unregulated, as the RBI may have difficulty in obtaining crucial information, as also in enforcing any prudential behavior required of such an intermediate holding company.

    What's in it for investors?
    While the RBI's discussion paper on this issue is subject to deliberation, we envisage that the immediate impact of this will not be on the regulatory norms but on the banking entities' desire to cash in on their subsidiaries. If the RBI maintains this stance, it will for the time being derail the plans of divestment of the insurance and AMC subsidiaries of both ICICI Bank and SBI. Having said that, we reiterate that this proposition does not dilute the value of the subsidiaries of the banking entities and will bear fruits for investors in the longer term.



    Equitymaster requests your view! Post a comment on "Banks: The subsidiary conundrum". Click here!


    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)