No Incentive For Subsidiary Route, Foreign Banks Tell RBI

Mumbai, June 28: | Updated: Jun 29 2002, 05:30am hrs
Foreign banks have conveyed to the Reserve Bank of India (RBI) that there is no incentive for them to opt for local incorporation as of now, and that maintaining the status quo — branch operations — still made sense. This was conveyed to RBI by foreign banks when they were asked to present their views as to why the banking sector in India has not been able to attract foreign direct investment (FDI).

The banks pointed out that the only incentive in local incorporation is reduced taxation, but this is more than offset by dividend tax and increased priority sector lending. Another impediment is of course the 10 per cent cap on voting rights. According to extant regulations, a shareholder can have a maximum of only 10 per cent of the voting rights in a private bank irrespective of actual equity holding in the bank.

RBI, in turn, has constituted a small committee to look into why the banking sector has not been able to attract FDI and finalise the subsidiary norms. Foreign banks were asked to present their views. The committee has representation from RBI’s Department of Economic Analysis and Policy and the Department of Banking Operations and Development.

The committee is also looking at options that could make it more attractive for foreign banks to pick up stakes in private banks. Some of these options could be — doing away with the 10 per cent cap on voting rights in a private bank, giving much more autonomy to the acquiring bank and allowing a foreign bank to pick up 51 per cent as against 49 per cent, thereby giving it management control. But for the moment, the committee is looking at only the private banking sector.

A senior foreign banker said, “With local incorporation, it will become much easier to set up branches as licencing will no longer be needed. But the fact of the matter is that no foreign bank has a business model, which entails setting up a vast network of branches. Anyway, it is much easier to get branch licences now than it was a few years back. There are other ways and means of increasing our reach apart from setting up branches.”

The banker added, “When we talk about incentives, it has to be in financial terms. As of now, we do not see much financial benefits in local incorporation. If there are incentives, we would look at the option.”

After the “clarification” over FDI in private banks issued by RBI, only the ING group has moved ahead with a 49 per cent stake in Vysya Bank. The rest with ambitions are still awaiting operational guidelines pertaining to voting rights, management control and the like.