The Reserve Bank of India (RBI) may ask foreign banks which have attained a particular asset size to operate as fully-owned subsidiaries, rather than as branches. This would be done in the interest of the depositors and act as a sweetener.
The central bank is expected to be more liberal with branch licences for foreign banks in under-banked centres. However, there is unlikely to be any relief relating to priority sector requirements. The idea of asking foreign banks to operate as wholly-owned subsidiaries is to enable the regulator to have better regulatory control over these entities and
ringfence risks.
The need for greater control has increased after the global financial crisis and the central bank is expected to issue
guidelines shortly.
?It may not be mandatory for all foreign banks to convert themselves into wholly-owned subsidiaries. However, it would be advisable that foreign banks, which have attained a particular size, be encouraged to operate as wholly-owned subsidiaries, in the interest of depositors,? said a banking source in the know of the development.
?This move would insulate depositors and the foreign bank?s local operations from their global operations,? explained the source. At the end of March 2009, foreign banks accounted for about 8.5% of the total banking assets, according to
RBI data.
The recommendations are still being discussed. The 2005 road map for foreign banks had prescribed a capital requirement of Rs 300 crore for local incorporation and had also permitted foreign banks to operate as wholly-owned subsidiaries. However, none of the foreign banks have been willing to operate as a subsidiary since they don?t see any advantages in doing so.
?To encourage foreign banks to switch to the subsidiary mode, the RBI is expected to give foreign banks who incorporate locally more branch licences in under-banked centres. They are unlikely to get any relaxation in priority sector limits and like domestic banks, would have to ensure that 40% of their credit is directed to the so-called priority sector consisting of agriculture and small businesses,? added the same source.
Currently, for foreign banks, this number is pegged at 32%. Export loans are part of priority sector loans for foreign banks.
At present, under World Trade Organization (WTO) norms, RBI is committed to 12 new branch licences to foreign banks every year. Although the number of licences given out has been way higher than this, foreign banks are not happy as RBI is more liberal with domestic banks when it comes to branch expansion.
There are about 30 foreign banks present in the country and many more are awaiting RBI approval to set operations.