No blanket relaxation on anvil

RBI to relax new cap-ad norms for foreign banks

Ujjal K Basu Roy

Mumbai, Aug 31: In a slight loosening of its tough stance, the Reserve Bank of India (RBI) has intimated foreign banks that it would consider a relaxation in the new capital adequacy and prudential norms on a case-by-case basis. These norms, which are to be effective from fiscal 2002, would not take forex loans extended by foreign banks as part of tier-1 capital for drawing up exposure limits to corporates.

Senior banking sources said that the RBI had stated that it was adopting global best practices in India and in the light of this, it regretted its inability to consider a blanket relaxation of the proposed norms. However, the RBI has sort of kept the window open by stating that each request would be considered on a case-by-case basis even though the parameters for doing so have not spelt out, as of now.

Foreign banks had earlier written individually to the RBI pleading their cases and asking for some sort of relaxation in the new prudential and capital adequacy norms. They had also met under the aegis of the Indian Bank’s Association to deliberate upon the matter, and made a joint representation.

The new norms are not expected to affect the bigger foreign banks — StanChart group, Citibank, HSBC, ABN Amro Bank and Bank of America — much on the capital front. They have surged ahead, both in terms of net profit as well as size of their balance sheets. They have substantial ambitions in India as well and have repeatedly emphasised their commitment to India.

However, the new norms would limit their efforts to increase the size of their balance-sheet in the future. These norms are expected to affect the smaller foreign banks to a much larger extent. Low or in some cases, almost negligible spreads have added to the problem.

Under the current norms, a foreign bank has to invest $10 million for a branch and $5 million for every additional one. A foreign bank with five branches technically invests $30 million or Rs 120 crore (at say, Rs 40 to a dollar), but grows a book out of sync with its capital base.

With a capital adequacy of 9 per cent, a foreign bank can technically have a maximum balance sheet size of Rs 1,333 crore, but to the extent it gives a $100 million cross-border loan, its capital base for single exposure-limit stands at Rs 520 crore. This allows it on-lend Rs 104 crore to a company, which in turn is 87 per cent of its infused capital of Rs 120 crore.

The RBI has basically stopped taking external borrowings as tier-1 capital because it throws capital adequacy norms to the wind shown by the example above. The RBI has mandated that foreign banks would have to bring in capital to meet their capital adequacy ratios. The existing norms had come into vogue in 1991 to tide over the forex crisis.

“It is a question of who will blink first. Can we really afford to have most of the foreign banks in the country moving out? We should see a round of lobbying now. Even the corporates are expected to join the lobbying since they would be losing out to an extent,” said a banker.

The measure taken by the RBI was the second-of-its-kind to ensure that foreign banks bring in fresh funds from their head-offices. Late last calendar, the RBI had barred foreign banks from raising tier-2 subordinated debt from the local markets.