Rejecting stiff opposition from the foreign banks, the Reserve Bank of India (RBI) is set to mandate foreign lenders to adhere to the 40% priority sector lending norm from April 1, 2013, bringing them at par with the local banks. Foreign banks at present are required to lend only 32% of their adjusted net bank credit for priority sector purposes.
A senior official told FE that the regulator has refused to grant any leeway in implementing this proposal for the foreign banks. Foreign lenders, in their inputs to RBI, have opposed the proposed target of 40% priority sector loans as they saw this move as adversely affecting their profits, industry sources said.
Last month, RBI had directed foreign banks with more than 20 branches in India to attain priority sector lending target of 40% in five years beginning next financial year. The government official said this proposal will be implemented and any relaxation is unlikely. New norms would affect banks, including Standard Chartered, HSBC and Citibank.
Industry insiders see this move as a prelude towards the RBI nudging foreign banks to incorporate locally as wholly-owned subsidiaries (WOS). RBI is keen to ensure that foreign banks operate as WOS as that would give it better control over the lenders. Meanwhile, CBDT would soon notify exemption from paying capital gains tax for the foreign banks converting their branches into subsidiaries.
Then finance minister Pranab Mukherjee had announced in the Budget that the government will ensure that subsidiarisation of the foreign banks is tax neutral in India. This meant the government will exempt any gains from conversion of business of branches into a subsidiary from capital gains tax. As on March 31, 2011, there were 33 foreign banks in India, accounting for nearly 7% of the total banking sector?s assets, RBI data show.
Lending to agriculture sector, small scale industries, micro credit, education loans and housing loans are counted as priority sector credit. Foreign banks with less than 20 branches will have to comply with existing norm of 32% priority sector credit. RBI announced the new norms in line of suggestions of a panel on priority sector credit headed by MV Nair, former CMD of Union Bank of India.