The Reserve Bank of India expects existing branches of foreign banks, of a certain size to voluntarily convert themselves into wholly owned subsidiaries (WOS). In a discussion paper on presence of foreign banks in India, the central bank said on Friday, it would be mandatory for banks which opt for branch mode of presence, in the country, to convert themselves into WOS if they become systemically important. To incentivise them to set up or convert into an WOS, the central bank says it could consider extending to foreign banks a branch expansion policy as applicable to private sector banks. In other words, they would not be given ?national treatment? like public sector banks.
Moreover, foreign banks WOS, with a capital adequacy ratio of at least 9% for preceding two completed years, and the accounting year and net non performing loans of less than 7% could declare a dividend. It appears that for any Capital Gains Tax arising out of transfer of property, goodwill and other assets of capital nature to its own newly incorporated subsidiary in India the provisions of Section 47(iv) of Income Tax Act, 1961 would be applicable to foreign banks converting their branches into subsidiaries. Foreign banks may approach the appropriate authority for suitable clarification
Accordingly, WOS would be able to open branches in tier-3 to 6 centers. Like in the case of domestic banks the foreign banks, for setting up branch in tier-1 and tier-2 centres, would have to present an annual plan and have to maintain a balance between the number of branches opened in urban and rural centres.
However, the current branch restrictions would continue to apply to existing and new foreign banks who operate as branches. ?The expansion of the branch net work of foreign banks in India ? both existing and new entrants ? who are present in branch mode would be strictly under the WTO commitments of 12 branches or as may be modified from time to time,? said the RBI paper.
In another major relief to foreign banks, the RBI has proposed a priority sector limit of 32% to WOS as against 40% for domestic banks though the sub-target of 18% for agricuIture would have to be met. RBI has also recommended that export finance would be considered as a part of their priority sector lending. To encourage foreign banks to convert to WOS the central bank has also said it would consider allowing them to raise rupee resources. They may be permitted to raise resources through issue of non-equity capital instruments in the form of Innovative Perpetual Debt Instruments (IPDI), tier I and tier II preference shares and subordinate debt as allowed to domestic private sector banks.
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.
?Foreign bank branches would be considered to be systemically important once their assets (on balance sheet and credit equivalent of off-balance sheet items) become 0.25% of the total assets (inclusive of the credit equivalent of off-balance sheet items) of all scheduled commercial banks in India as on March 31 of the preceding year,” said the RBI in its discussion paper. For local incorporation the foreign bank would need to have approval of the home country regulator.
Further the RBI is also in favour of making it mandatory for select foreign banks to enter the country through the subsidiary route. Those include banks that are incorporated in a jurisdiction that has legislation which gives deposits made/ credit conferred, in that jurisdiction a preferential claim in a winding up.
Additionally, banks which do not provide adequate disclosure in the home jurisdiction, banks with complex structures and banks which are not widely held would need to enter as WOS. Currently, top five foreign banks account for more than 70% of total balance sheet assets of foreign banks in India.