The Reserve Bank on Friday came out with a discussion paper suggesting that foreign banks should be incentivised to operate in India as wholly-owned subsidiaries, as against the current system of having presence through branch network.
The discussion paper on which RBI has invited comments from stakeholders by March 7 says, “On balance, the subsidiary model has clear advantages over the branch model despite certain downside risks ...There may be a need to incentivise the subsidiary form of presence of foreign banks.''
Under the wholly-owned subsidiary (WOS) form, a foreign bank will have to operate as a locally incorporated legal entity and will be subject to the domestic laws such as the Companies Act and the Banking Regulation Act.
At present, there are 34 foreign banks operating in India, with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the total asset size.
With regard to repatriation of profits by foreign banks, it said the WOS form be allowed to pay dividend to the parent bank, like the domestic banks.
To encourage existing foreign banks to convert into WOS, the discussion paper says the subsidiaries should be given preferential treatment for opening of branches as compared to those foreign banks which operate through branches.
The paper points out that the government has already clarified that a company with a foreign holding of over 50 per cent is a foreign company.