A high-level RBI team, led by deputy governor SP Talwar, came back from London last week after successfully negotiating with the FSA brass on the contentious issue of closure of Indian bank branches in the UK. Among 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 also have branches in the UK.

The FSA--an independent supervisory authority of the financial system in the UK, including the insurance sector and capital markets--forced Uco Bank to close down one ofits UK branches last year. It has been "probing" the "business risk" and "control risk" of Indian banks operating in the UK.

The licensing norms of the 20-and-odd Indian bank branches in the UK came under the FSA's glare against the backdrop of the delay in India passing the Fema bill and deteriorating asset quality. The supervisory authority's areas of concern also included Indian banks' exposure to priority sector lending, the lack of succession plans and lower capital adequacy ratio.

It was also planning to pare the India exposure limit of Indian bank branches from the present limit of up to three times net-owned funds (NOF) to two times NOF. However, RBI intervention has stymied the FSA move.

According to sources, the RBI team made it clear to the UK supervisory body that it cannot interfere in the functioning of Indian banks in the UK without consulting the Indian central bank. "If the FSA persists with its policy, the RBI can take a tough stand vis-a-vis UK banks operating in India. The regulatoryauthorities should not deal with banks directly and instead consult each other on operational issues," sources close to the negotiations said. RBI officials, however, refused to speak on the issue.

The FSA recently told the boards of directors of Indian banks with a UK presence that "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 from countries where there is inadequate or no money laundering legislation."