RBI nixes banks' subsidiary plans

Bank of India, South Indian Bank, Lakshmi Vilas Bank’s proposals rejected, to add to the earlier ones of ICICI Bank and Axis Bank.

The Reserve Bank of India (RBI) has rejected several banks’ proposals to launch wholly-owned subsidiaries, as the regulator did not find any merit in floating such arms.

Public sector lender Bank of India, which wanted to float a subsidiary to train human resources and recruit professionals, did not find favour with the regulator. State-run banks have to follow a uniform remuneration package, which is unattractive compared to their private sector counterparts. However, a bank could offer market related pay package for the employees that are hired by its subsidiary.

RBI, however, was not convinced by the idea.

FALLING FLAT
Banks	Subsidiary planned
Bank of India	Human resources
South Indian Bank	Gold loan
Lakshmi Vilas Bank	Housing loan
ICICI Bank	Infrastructure finance
Axis Bank	Infrastructure finance

Similarly, South Indian Bank wanted to open a subsidiary to exclusively offer gold loans. RBI has also nixed that plan, as a bank is allowed to offer gold loan directly through its branches and a subsidiary route is not required for this activity, the regulator felt.

"We had initially taken shareholders' approval to launch a gold loan subsidiary. The idea was to gold loans through this subsidiary in areas where we don't have a branch," said VA Joseph, managing director and chief executive officer of South Indian Bank.

The Thrissur based lender is a major player in the gold loan market and gold loans account for 20 per cent of its credit portfolio.

Another south India-based lender, Lakshmi Vilas Bank wanted to float an arm to sell home loans, again an activity which a bank is allowed to undertake through its branches. This proposal was also rejected by the regulator on similar grounds.

As a result, Lakshmi Vilas Bank scrapped its plans to set up a housing finance subsidiary. The bank’s housing loan portfolio is currently around 2.5 per cent of its total advances. Its credit portfolio was Rs 8,813 crore as of September 30, 2011.

“RBI is of the view that those businesses, which are possible through bank branches, should be done directly by the bank. There is no need to create a separate non-banking finance subsidiary for those businesses. Hence, for businesses like gold loan, housing finance, etc RBI is not keen to allow banks form a separate subsidiary,” said a top executive of a private sector bank.

Earlier, proposals from ICICI Bank and Axis Bank to float an infrastructure subsidiary also did not find favour with the regulator. In the last couple of years, RBI has given its permission to open subsidiaries to undertake those activities which a bank cannot do directly through its branches. These businesses include securities broking and insurance underwriting.

In addition, the regulator has also approved Bank of Baroda’s application to convert its credit card subsidiary into a joint venture by selling 51 per cent stake to the second largest bank of Spain, Banco Bilbao Vizcaya Argentaria.