One of the key risks posed by the bank subsidiary model is that the parent bank is directly exposed to the functioning of various subsidiaries and any losses incurred by the subsidiaries inevitably affect the bank balance sheets. Such risks can be mitigated largely by the FHC structure, the Working Group of FSLRC says
The Working Group (WG) set up by the Banking Financial Sector Legislative Reforms Commission (FSLRC), has recommended a holding company structure for banks, including state-run and private as well as for new entrants.
The WG headed by Kishori Udeshi, former deputy governor of the Reserve Bank of India (RBI), said, “...the current mode of operations of banks under bank subsidiary model (BSM) is inadequate and there should be a shift towards the financial holding company (FHC) model as a preferred model for financial sector in India. The FHC model mitigates the risks spilling over to the bank from other entities in the group. In a holding company model the banking entity will be ring fenced.”
The Banking Regulation Act does not mandate the separation of retail banking from wholesale/investment banking. However, regulated entities in the financial sector separate these activities and house them in different entities for ease of regulatory oversight, by different regulators. The model currently followed by regulated entities is BSM.
In India, banks have expanded into non-banking activities during the last two decades and have set up subsidiaries in almost all non-banking financial areas such as mutual funds, venture capital funds, pension funds, stock broking, insurance and housing finance.
Once transition to the structure, as contained in the recommendation of this WG, is achieved, subsidiaries of banks must only do such activities which banks themselves can undertake. “Subsidiaries of banks should only do business that could have been done purely within the bank. If insurance cannot be done by a bank, it should not be done by the subsidiary of a bank,” the report said.
According to the WG report, there must be ring fencing of banks vis-a-vis other non-bank entities. “Capital of banks should not be allowed to take any risks apart from banking risks, and mechanisms must be put in place through which resources from the bank does not flow up into the FHC or to sister subsidiaries in times of crisis, or otherwise,” it said.
In addition, banks must not lend to intermediaries, which are not regulated by a financial sector regulator. However, the operation of certain financial institutions such as mutual funds might require access to short-term funding and such short-term funding must be within stringent prudential regulations, the report said.
At present, banks are allowed to lend to entities that are not registered with the RBI, like insurance companies registered under the Insurance Act (1938), nidhi companies notified under Section 620A of the Companies Act (1956), stock broking companies/merchant banking companies registered under Section 12 of the SEBI Act (1992); and housing finance companies regulated by the National Housing Bank (NHB).
The Working Group said, subsidiaries of banks should not carry on activities which the parent bank themselves cannot. “If banks have subsidiaries, such as a securities brokerage house, then such subsidiaries cannot invest in products which the bank itself cannot invest in. This means that risker products which the bank cannot have in its balance sheet cannot be reflected in the balance sheet of its subsidiary,” it said.
Considering the issues and gaps in the current legal framework and drawing on the recommendations of standard-setting bodies and international best practises, this WG recommended that a sophisticated resolution corporation be set up that will deal with an array of financial firms including banks and insurance companies.
The mandate of this corporation must not just be deposit insurance. It must concern itself with all financial firms, which make intense promises to consumers, such as banks, insurance companies, defined benefit pension funds, and payment systems. A key feature of the resolution corporation must be its swift operation. It must also effectively supervise firms and intervene to resolve them when they show signs of financial fragility but are still solvent. The legal framework must be so designed to enable the resolution corporation to choose between many tools through which the interests of consumers are protected, including sales, assisted sales and mergers, the WG report said.
Insider trading in Amsterdam in the 18th century, in stocks like those of the East India...
Nifty is oversold and will rally next week once it closes above 5,690
The market settled in the red on global concerns and domestic political worries, making it the sixth consecutive closing in the negative and the lowest closing since 26 November 2012.
The Nifty is oversold and will rally next week once it closes above 5,690. The National Stock Exchange (NSE) witnessed a turnover of 68.91 crore shares and advance-decline ratio of 488:1019.
The market opened flat on political worries after India supported a US-sponsored resolution seeking a probe into human rights violations in Sri Lanka and on unsupportive global cues. Markets in Asia were mostly lower on concerns from Cyprus while US markets settled down overnight as software services major Oracle’s revenues were below expectations.
The Nifty opened one point up at 5,660 and the Sensex resumed trade at 18,785, eight points down from its previous close. Select buying in initial trade pushed the indices hither in initial trade. However, intense volatility saw the benchmarks fluctuating between the red and green a couple of times.
Selling in consumer durables, realty, PSU and IT stocks led the market into the red in mid-morning trade. The volatile market continued to tread southwards in subsequent trade. A weak recovery attempt was made around noon, but sellers overpowered the buyers and sent the indices further down.
The market fell to its low around 1.30pm as selling expanded. At this point, the Nifty slipped to 5,632 and the Sensex declined to 18,669. However, value picking at the lows saw a smart recovery which helped the indices to emerge into the positive.
Gains in power, auto, capital goods and banking stocks led the benchmarks to their highs in the last hour of trade. The Nifty rose to 5,691 and the Sensex climbed to 18,860 at their respective highs.
However, the gains were short-lived as the indices went on a downtrend once again which resulted in the market closing in the red for the sixth day in a row.
The Nifty settled seven points (0.13%) lower at5,651 and the Sensex fell 57 points (0.30%) to finish at 18,736.
Among the broader indices, the BSE Mid-cap index fell 0.26% while the BSE Small-cap index dropped 0.96%.
The sectoral gainers were BSE Power (up 0.27%); BSE Metal (up 0.15%) and BSE Capital Goods (up 0.12%). The top losers were BSE Consumer Durables (down 2.06%); BSE Realty (down 1.31%); BSE IT (down 0.82%); BSE TECk (down 0.70%) and BSE Healthcare (down 0.54%).
Twelve of the 30 stocks on the Sensex closed in the positive. The main gainers were Bajaj Auto (up 3.85%); Jindal Steel & Power (up 3.11%); Hindalco Industries (up 1.64%); Hero MotoCorp (up 1.52%) and Tata Power (up 1.43%). The chief losers were State Bank of India (down 1.71%); Tata Steel (down 1.68%); Sun Pharmaceutical Industries (down 1.42%); Bharti Airtel (down 1.28%) and TCS (down 1.27%).
The top two A Group gainers on the BSE were—IDFC (up 4.83%) and Dish TV India (up 4.67%).
The top two A Group losers on the BSE were—NHPC (down 6.44%) and AstraZeneca Pharma India (down 5.07%).
The top two B Group gainers on the BSE were—Tera Software (up 18.95%) and Oswal Spinning & Weaving Mills (up 18.63%).
The top two B Group losers on the BSE were—Warren Tea (down 19.99%) and MVL Industries (down 19.35%).
Of the 50 stocks on the Nifty, 25 ended in the green. The key gainers were IDFC (up 6.19%); Ambuja Cement Company (up 4.20%); Bajaj Auto (up 3.97%); Bank of Baroda (up 3.70%) and JSPL (up 3.34%). The major losers on the index were DLF (down 3.17%); Ranbaxy Laboratories (down 1.9%); SBI (down 1.86%); Tata Steel (down 1.78%) and TCS (down 1.66%).
Markets in Asia ended lower on concerns of a collapse of the Cypriot banking system as the debt-ridden nation failed to secure from Russia. On the other hand, better-than-expected flash PMI data saw the Chinese market settling firm.
The Hang Seng declined 0.50%; the Jakarta Composite tanked 1.66%; the KLSE Composite fell 0.24%; the Nikkei 225 tumbled 2.35%; the Straits Times dropped 0.28%; the Seoul Composite shed 0.11% and the Taiwan Weighted lost 0.20%. Bucking the trend, the Shanghai Composite rose 0.175.
At the time of writing, the CAC 40 of France was down 0.57%; DAX of Germany declined 0.29% and UK’s FTSE 100 slipped 0.05%. At the same time, US stock futures were trading with marginal gains.
Back home, foreign institutional investors were net buyers of shares amounting to Rs368.31 crore on Thursday while domestic institutional investors were net sellers of equities totalling Rs30.08 crore.
Pharma major Aurobindo Pharma has received final approval from the US Food & Drug Administration (USFDA) to manufacture and market Valsartan and Hydrochlorothiazide tablets. The tablets are generic equivalent to Novartis Pharmaceuticals Corp’s Diovan HCT tablets and are indicated for the treatment of hypertension to lower blood pressure and falls under the cardiovascular (CVS) therapeutic category. The stock settled 4.26% down at Rs139.25 on the NSE.