State Bank of India and Bank of India have dropped their plans to revive their branch operations in Pakistan.
While the banks have denied that their rethink has any connection to the tension between India and Pakistan, the timings for the call-off is significant. The bank managements say they were forced to take a decision as Pakistan has hugely raised the minimum capital requirements of foreign banks that want to venture into the country. Both the banks had approached Pakistan?s apex bank, State Bank of Pakistan (SBP), in September 2008, to seek an approval to re-start their banking activities that existed in the cities of Karachi and Lahore till 1965.
Pakistani banks like United Bank of Pakistan and Habib Bank too have not approached RBI so far to obtain branch opening permissions in India. Earlier, these banks too had, as part of exchange programme, announced their decision to expand their operations in India.
The Pakistan central bank hiked the minimum paid-up capital requirement for foreign banks operating in Pakistan to Rs 1,400 crore (Pak Rs 2,300 crore) in a circular issued on September 5, 2008. Foreign banks will have to add Rs 366 crore (Pak Rs 600 crore) by Dec 2009.
?In order to further strengthen the solvency of individual bank/DFI, it has been decided to raise the minimum capital requirements (MCR) as well as capital adequacy ratio (CAR) calculated as per Basel II, and has to maintain a minimum capital of Rs 23 billion by Dec 2013,?? said the SBP circular.
Speaking to FE, D Lakshmi Narayana, deputy general manager (international operations), Bank of India, said, ?We have cancelled the plan to re-operationalise our banking operations in Pakistan in spite of the go-ahead given by the Reserve Bank of India, as Pakistan recently hiked the minimum paid-up capital requirement for foreign banks operating in Pakistan. In the current scenario, we feel that it is not in the interest of our bank to invest Pak Rs 2,300 crore in Pakistan in a bid to capitalise on Indo-Pak trade that is currently pegged at around $2 billion per annum.?
?The information on capital requirement was conveyed to us by SBP after we approached them to get branch opening approval. Besides, SBP also asked us to remit $50,000 for processing our application. No country in the world currently asks for huge capital investments when approached for branch expansion of an existing bank with a credible track record. Now-a-days, the foreign regulators merely request ?a letter of support? from parent banks in a bid to facilitate the branch expansion through subsidiaries in their respective countries. Pakistan is unexpectedly asking for a mammoth investment, ? Lakshmi Narayana said.
A senior official of State Bank of India, who preferred to remain anonymous said, ?We too do not want to go ahead with the plan to restart our banking operations in Pakistan due to the massive hike in the capital requirements. It does not make financial sense on our part to obey these latest guidelines.?
As reported by FE on September 12, 2008, six Indian banks, including State Bank of India and Bank of India, owned lavish branch premises in the cities of Lahore and Karachi, and were seized by the government of Pakistan as enemies? properties in 1965. Though the memorandum of understanding for reviving banking relationship between RBI and SBP was signed on November 7, 2005, nothing had progressed afterwards because of various hurdles.