ICICI Bank is the daughter of ICICI who swallowed her mother. ICICI saw an end to its business of long-term finance after liberalization brought in new competitors. Tax laws made it better for its profitable subsidiary bank to take it over than the other way round. But before the two became one, ICICI had gone into mutual funds and insurance with foreign partners; these businesses too were subsumed under ICICI Bank. Now ICICI Bank wants to hive them off into separate subsidiaries. The Reserve Bank of India demurs.

In the bad old days, the RBI would have sent ICICI Bank a one-line letter saying in effect, “Don’t you dare!” Today, however, ICICI Bank is the fastest growing bank; it will probably overtake the 200-year-old State Bank as India’s largest bank in four years. It is a darling of foreign investors. The RBI is aware of ICICI Bank’s numerous customers and rich owners; so it is treading warily. It has issued a well-reasoned, tentative ‘Discussion Paper’ on the issue of holding companies. The unarticulated message of the paper is that whereas ICICI Bank would prefer to make itself a holding company and to own insurance and financial businesses as subsidiaries, the RBI would like the owners of ICICI Bank to set up a new holding company which would own the bank and other businesses as subsidiaries. The reason is that there are different regulators for banking, insurance and mutual funds, and the RBI would like a structure that mirrors the regulators’ territories. The reason the RBI actually gives is that insurance and non-bank businesses would engender their own risks, which it would not like to see carried over to the bank.

This would seem a pretty modest and reasonable preference, but ICICI Bank does not feel quite like obliging the RBI. If it did so, it would have to set up a new company and persuade its equity owners to invest in it; they would see no reason to do so. It does not want to go through that rigmarole. The contretemps has arisen because the government in Delhi has laid down different percentages of foreign equity for insurance and non-bank finance, and the RBI has its own rules about foreign equity in banking. There are two ways of resolving the problem. One would be for the RBI to scrap its restrictions on foreign equity, or at least to relax them to a level more liberal than those imposed by the government in Delhi. It would be loath to do so because it sees itself as the protector of inefficient foreign banks, rural banks and cooperative banks and would not like to expose them to competition. So, maybe, the Central government should reduce its own foreign equity maxima to the low levels allowed by the RBI. If that puts off foreign investors and brands Delhi as an old-style socialist dinosaur, so be it.