ICICI Bank and State Bank of India (SBI) are proposing the setting up of an intermediate holding company model, which can insulate banks from the risks of raising capital for non-banking business, as the holding company would be able to raise funds independent of the bank. It will also limit the exposure of the parent bank and its investors to the non-banking business.

This is what the Indian Banks'' Association (IBA) has said in its response to a discussion paper on holding companies released by the Reserve Bank of India (RBI).

Bankers agree that the holding company would reduce risk for the parent bank, as their investment in the holding company would have to fall within the prescribed limit of 20 per cent of the banks'' capital and reserves. This is the limit for all investments by any bank in non-banking financial entities. Banks would have to obtain RBI approval for any fresh investment, including the intermediate holding company, the IBA pointed out.

In its discussion paper released last month, the RBI had expressed concerns that the intermediate holding company model will not come under its regulatory supervision, as these entities are not required to be registered as non-banking finance companies (NBFCs).

The IBA has responded: "An intermediate holding company in a banking group could be regulated as any other NBFC. Further, at the time of granting approval for formation of such a company, the RBI can stipulate such conditions as it considers appropriate."

The IBA has appealed to the RBI to allow Indian banks to set up intermediate holding companies till such time as they are able to set up financial holding (FHC) or bank holding companies (BHC). Creating an FHC or a BHC would involve taxation and regulatory issues, because it would involve transfer of shareholdings or assets between the entities, said IBA.

Meanwhile RBI deputy governor V Leeladhar said at the sidelines of a seminar on Thursday 13 September: "We will soon finalise guidelines on banks creating holding companies for their subsidiaries. We have floated a discussion paper and are awaiting responses. Once we get them, we will consolidate them."