Financial Holding Company Structure for India

Abstract

Indian banking sector is passing through another crucial phase in its evolution with the Reserve Bank of India proposing the formation of holding companies in banking groups. This paper offers an analytical discussion about the proposed financial holding company (FHC) or banking holding company (BHC) that is claimed to offer considerable advantages as the banks will be much better protected against possible adverse effects from the activities of their non-banking financial subsidiaries. The paper recommends that the financial holding company (FHC) model ought to be pursued as a preferred model for the financial sector in India. In addition, the FHC model can be extended to all large financial groups – irrespective of whether they contain a bank or not. Accordingly, there can be Banking FHCs controlling a bank and Non-banking FHCs, which do not contain a bank in the group.

Keywords: banking risk, diversification, financial holding company, banking holding company

JEL Classification: G21, G28, G29