The licensing norms of the 20-and-odd branches of Indian banks in the UK have come under the microscope of FSA against the backdrop of the delay in passing the Fema bill and the deteriorating asset quality. The FSA, which forced Uco Bank to close down one of its UK branches last year, is also probing the "business risk" and "control risk" of Indian banks operating in the UK. Its areas of concern also include the banks' exposure to priority-sector lendings, the lack of succession plans and lower capital adequacy ratio, sources said.

The RBI team comprises chief general manager of the department of banking operations & development (DBOD) Amalendu Ghosh and generalmanager Amar Sinha besides Talwar.

According to sources, the FSA-- an independent supervisory authority of the financial system in the UK including insurance sector and capital markets--is planning to pare the India exposure limit of the Indian banks' branches. However, the RBI does not approve of the local regulator's way of directly dealing with the Indian banks' branches in the UK, bypassing the RBI. "At this juncture RBI intervention was necessary," sources said.

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 planning to slash the exposure limit to two times of NOF. However, the RBI intervention may bring in a change in the FSA stance.

If FSA actually decides to slash the India exposure limit drastically, Indian banks operating in the UK 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 buyingIndian 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 FSA recently told the boards of Indian banks concerned: "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 current confidentality laws in India 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 are reviewing our approach to the supervision of banks fromcountries where there is inadequate or no money-laundering legislation."