Royal Bank of Scotland (RBS) would have to rework the proposed sale of its retail and commercial banking assets in India to HSBC. This is because the Reserve Bank of India?s (RBI) decision not to transfer select branch licences of RBS to HSBC.

The RBI move could affect the valuation of the deal. Network of branches is critical to valuation as it is not easy to get RBI permission to open branches. On an average, the central bank issues about 14 branches to all foreign banks every year.

? For sometime, the central bank has been contemplating how to treat this sale. It has been consistently following a policy of not transferring branch licences to prospective buyers in a portfolio sale,?? said a source in the know of the development.

In an email response, an HSBC spokesperson said,?We would not like to comment on speculation or rumours. However, we would like to state that we are progressing with the regulatory process for the acquisition of RBS’ retail and commercial banking business and look forward to welcoming these customers and employees into the HSBC family, once all necessary approvals are in place.??

Responding to an email query,an RBS spokesperson said, ?We are continuing to make progress towards completing the sale of our retail & commercial businesses in India to HSBC and are continuing to work closely with HSBC and the regulator towards this.”

In July 2010, HSBC had announced that it would acquire select assets of RBS for a premium of $95 million (Rs 444 crore) over the net asset value of the business which has not been set yet. The price will be subject to clawbacks depending on losses in unsecured lending in the two years after the deal is completed. RBS is currently running down its unsecured loan business, which includes credit card and personal loan book. The bank is not sourcing fresh unsecured loans. RBS?s advances book has shrunk to Rs13,406 crore at the end of March 2010, against Rs16,660 crore in the previous year,according to RBI data.

In June 2009, the RBI had conveyed to RBS (the erstwhile ABN Amro Bank) that branch licences are not transferable. The bank had then requested that some branches be transferred to the prospective buyer, particularly at those locations where it had no presence.

RBS, which had acquired 31 branches in the country when it bought out the ABN Amro Bank NV’s Asian operations in 2007, had decided to retain five branches and surrender the remaining to RBI. Following this, HSBC was to apply for fresh licences.

However, sources suggest that ?this doesn?t seem to have gone down well with RBI as it is strictly against sale of branch licences?.

There is no precedent for RBI transferring bank branch licences to a prospective buyer in the course of a portfolio sale. In 2006, when Bank of America sold its Indian retail banking division to erstwhile ABN Amro, only the retail business assets were transferred and not branches. Bank of America continued to expand its wholesale banking business in the country.

Transfer of branch licences has been permitted only in the case of a bank buyouts. For instance, Standard Chartered acquired American Express Bank from American Express Co in February 2008 for a cash consideration of $823 million. Since this was a global acquisition, the seven branch licences in India were transferred to Standard Chartered.

In 2002, Standard Chartered merged Grindlays with itself and formed the largest foreign bank in India in terms of profitability and network. It was part of Stanchart?s acquisition of Grindlays operations in West Asia and South Asia. In this case also transfer of branches were permitted, as it was a bank buyout.