The Reserve Bank of India (RBI) has expressed serious concerns over the holding company structure proposed by India's two biggest banks: the State Bank of India, and ICICI Bank. The holding structure that ICICI had proposed was the first of its kind in the world, and is key to ICICI's future growth and competitiveness. ICICI Financial Services, the holding company with a valuation of $10 billion, was mooted to house the group's non-banking subsidiaries, including its life and general insurance companies, and asset management, which is currently on the bank's books. The idea was to make them financially independent by allowing them to raise resources by way of private equity, ipo or debt funding.
What are RBI's objections to the structure? Broadly, three. One, it will be harder for the central bank to regulate an entity that has multiple layers (operating bank, holding company, and non-banking subsidiaries). Two, it may result in excessive debt funding, largely by ICICI's life insurance subsidiary. Three, investors wouldn't know where their money is getting invested and, therefore, may suffer. Experts pooh-pooh the first two concerns. Since ICICI's proposed holding structure does not envisage any foreign (tax haven)-registered intermediate company, it has no chance of escaping RBI's purview. They also point out that there are para-banking guidelines under which entities such as Sahara India Financials are functioning without any problem.
RBI's fears of excessive leveraging are also baseless, say experts, since the regulator can prescribe the prudential norms for debt and capital adequacy, not just for banks but also for NBFCs. As per the existing guidelines, life insurance companies cannot raise any kind of debt, including hybrid capital. The only point that banking experts are finding hard to argue against is RBI's concern that investors will have less visibility into use of their money, although ICICI has already said that the holding company will only fund the life insurance venture, since neither the general insurance company, ICICI Lombard, nor the asset management firm, ICICI Prudential Mutual Fund, need any money.
RBI's final verdict is expected by end of October, but if it sticks to its guns, then ICICI will have no choice but to fund the life insurance subsidiary directly from the bank's balance sheet. That means less money for corporate and retail borrowers. The other options are to increase the foreign direct investment limit in life insurance companies from 26 per cent to 49 per cent or higher, or allow them to offer stock to public. But given intransigent Left partners, the government is unlikely to allow either of the two.