Finance ministry, RBI spar over public sector banks holding company.

NEW DELHI: The Reserve Bank of India and the finance ministry have clashed over the proposed financial holding company for public sector banks, a move that could further delay its creation and upset the government's plan to capitalise public sector banks.

The finance ministry has shot down the RBI's proposal to cap the leverage available to the holding company on a par with the holding companies formed to float private banks under the proposed rules for new bank licences.

 "There are some issues with regard to financial holding company for PSBs," said a finance ministry official, downplaying the difference between the two, terming them as part of the normal discussion process.

RBI and finance ministry have had their share of differences, with the split becoming apparent over the issue of rate cuts to spur growth. They differed over the question of banking licences to real estate and broking firms as well.

In the latest run-in, RBI has proposed that the leverage available for private financial holding companies eligible for new bank licences should be kept at 1.25 times of the equity capital of the financial holding company and wants the same criterion to be followed by the proposed state-owned holding company.

The leverage available regulates the debt that a company can raise against its equity capital. "This will be a multiple of the consolidated equity capital of the group, which includes capital of its subsidiary companies taken together," said an RBI official, adding that it is a conservative cap, given the risk involved with banking operations.

The finance ministry, however, is opposed to the suggestion and does not want RBI to link the new banking licence policy with the proposed holding company for PSBs. "We are not in favour of the same rule being applicable to the proposed financial holding company for PSBs as the company will enjoy sovereign guarantee," the above quoted finance ministry official said.

Putting a cap on leverage of the financial holding company will directly impact its capital-raising ability, he added.

Public sector banks will need capital infusion of up to Rs 90,000 crore over next five years to conform to the Basel III norms, but the requirement can be lower if the government decides to lower its stake to 51% in state banks. The government is looking to meet the capitalisation needs of PSBs through the holding company, which will enable it to raise debt.

Sector experts support a level-playing field while framing rules for enities. "It is important to have a cap irrespective of whether public or private. It's like the capital adequacy norms which are applicable to all banks," said Akeel Master, head of financial services at KPMG.


Source : economictimes.indiatimes.com