In order to implement
the Basel norms Government capitalizes PSBs. Under the budgetary constraints it’s
no more feasible to capitalize the PSBs. Hence there is a proposal to form
HoldCo – Non-operational Financial Holding Company. What is a holding company?
How will it help the Government? How it is different from PDMA?
The common understanding of the
term “holding company” is an entity that holds more than 50% of the voting
capital of the subsidiary. So it is a parent company which has investment of
>50% hence they can have substantial powers to take decision on the way a
company is run.
With NOFHC (Non-Operative Financial
Holding Companies), RBI wants to explore the same with regard to bringing Basel
norms in banking sector, predominantly with respect to NBFC’s which is less
regulated hitherto.
There is a wonderful write-up on
this which I just found:
Just read it you will understand
better and there is an RBI working paper on the same too.
Can a holding company
invest in more than one company? In other words, is it one to one relation or
one to many?
Yes. A holding company can be of
individual company investing in group of companies or a conglomerate investing
in a single company. Normally holding companies are seen in similar nature of
industries. They don’t diversify under one holding company.
Please read the below report. It’s
11 pages and explained well:
How will it help government…? Here the companies forming
NOFHC’s will ensure the working of the NBFC’s in a better way and thus better
control.
Normally it’s seen that the NOFHCs
are formed by the big PSU’s who want to explore the niche area of NBFCs which
runs across industry like insurance, asset management etc. Now the fact that
big PSUs try to invest in these it’s all the more important that proper risk
parameters are observed and public money is secured hence these innovations.
PDMA is Public Debt Management
Agency which manages Government debt.
Can u elaborate your question on how is NOFCHC is linked to PDMA?
I basically did not
understand HoldCo. Secondly I wanted to understand how it is different from
PDMA which is recently proposed to help government to better manage the
financial aspects. With some clarity on HoldCo I understand that government has
made this innovative arrangement to shed the responsibility of capitalising
banks.
Holding company you have understood.
What happens in holding company is that various players come together to invest
in NBFCs and not one bank. If one bank
comes to do so then to that extent banks have to compromise with risk parameter
as per Basel norms which is 9% of weighted average assets and thus government being
the majority owner in PSBs then it would further try to infuse capital in PSBs which
is detrimental as far as the debt goes.
The return on investment in PSB
is 2 to 3 % and whereas the financing cost of government investing in these
banks are more than the returns what it gets from these banks and hence its
debt situation deteriorates. Hence RBI has found a way to get this anomaly
corrected through NOFHC’s.
Example:
Imagine a situation where your
grandpa is a philanthropist. He wants to invest in companies that do some
social work.
But, he realises that he gets
less returns, but still funds them as they have wonderful reach to the society
(PSBs have huge established network and they are supporting whatever the government
says!)
After some time, he starts
borrowing money to lend them. He borrows at 8% and gives at 3%.
This can’t be sustained. So, what
does he do?
He talks to his other friends and
says that, “hey, why don’t we form a company, that will invest in these companies
that I am funding now?!”
These are his friends, (like
ONGC, SAIL etc. for the government!) who are not so rich, but have some money
to invest.
So, they all form a company,
which will not do any operation, but, just provide funds.
The loss is still there. But,
then ONGC, GAIL etc. will give that from their profit and thus, will have to
pay fewer dividends to their shareholders, who are again government
organisations!!
The company your grandpa forms to
invest is the holding company!!
Actually he is not solving the
root cause of the problem! But, he is just spreading the deficit to many and
thus pushes the problem to the future!!
The government will not have to
shell out money immediately to meet the Basel norms! It will come from ‘other’
government and Para-government agencies!
So, it doesn’t dent the Fiscal
deficit of the government! These are basically ‘jugads’ that the government
keeps inventing!!
The holding company
is used to pull up NBFCs which are specialised areas of financing as it
supports the specific sectors and in these sectors the major problem is financing,
but these are profitable businesses.
You are right!! This holding
company idea is questioned by many!!
Infact, the sound argument is that, a commercial bank
has to increase its capital base, only by its profits!!
Infusing capital from government,
directly or indirectly is not a good practice!! But, then even nationalisation
of the banks was also not a good step seen from the purely financial angle!! Isn’t
it?!
So, government has its own logic!
😊
Yes… It’s only pushing the
immediate demands for investment by PSUs at lump sum to spreading the
investment so that the PSU’s can manage the Basel norms by not losing the
opportunities in these sectors. All boils down to Return on investment J
But, RoI has become EroI thus
bringing the latent benefits also in the picture!! 😊
Sir in this case we
need a NOFHC… is understood Sir. When would we need an Operating Company?
Why you need an operating
company? When they are operated by the banks themselves?
It’s required only when the
company (or bank in this case) is not run properly.
The intention of RBI is to slowly
remove the stakes NOFHC has in these holding companies and make the NBFC’s self-sustainable.
That’s why non-operational. They don’t
want these creatures to exist permanently but only till the NBFCs stand on
their legs.
Yes, as sir says, when you don’t
interfere with the operations, you can be pulled out any day without upsetting
the apple cart!
No comments:
Post a Comment