In a recent communication to the boards of banks which have presence in the UK, the FSA said, "India has a number of legislative measures designed to counter money laundering but these do not meet the standards set by the Vienna convention. We understand that there are proposals to introduce money-laundering legislation that will meet these standards but this has been delayed.

"The confidentiality laws in the country prevent you from probing the source of funds for suspicious transactions. There is a risk that this could provide a conduit for laundered funds to enter the UK and other financial systems. This situation is unsatisfactory. We arereviewing our approach to the supervision of banks from countries where there is inadequate or no money-laundering legislation."

The FSA is also probing the "business risk" and "control risk" of the banks. The asset quality and earnings of Indian banks, according to the authority -- an independent supervisory authority of the financial system in the UK including insurance sector and capital markets -- are very sensitive to domestic economic shocks, "partly due to concentration of the asset portfolio on the Indian economy." Indian banks' obligation to lend 40 per cent of advances to the priority sector also increases the risk of rising non-performing assets (NPAs), it said. "Earnings may erode in the future due to loss of market share as a result of increasing competition in the market.

Public-sector banks in India also have high staffing costs and the scope for you to reduce these costs is limited due to government and trade-union restrictions," the FSA pointed out. The supervisory body is likely topare the India exposure limit of these branches. At present, Indian banks operating in the UK are allowed to take exposure in Indian assets up to three times their net-owned funds (NOF). The FSA is likely to slash the exposure limit to two times of NOF. The measure is expected to bring in a paradigm shift in Indian banks' business in the UK. "If FSA decides to slash the India exposure limit drastically, banks concerned will be forced to change the profile of their asset base as traditionally their exposure to India is quite high. The State Bank of India which has been buying Indian papers from the market will be forced to sell off some of its Indian assets," a banking source said.

Among the Indian banks, Bank of Baroda has the maximum number of branches in the UK, followed by Bank of India and the State Bank of India. Besides, Canara Bank, Syndicate Bank and United Commercial Bank have also branches in the UK. The bank boards have already written to the Reserve Bank of India which is expected to take upthe issue with the FSA as well as Bank of England. According to senior bankers, FSA is closely assessing the "risks" of the Indian banks' business in the UK. "As a matter of caution, the supervisory authority is likely to bring down the exposure limit to all emerging markets. In anticipation, some of the branches of the banks have already started shifting focus from Indian assets," bankers said.