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Updated: June 5, 2013 17:03 IST

Local incorporation norms for foreign banks after sorting out issues: Subbarao

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D. Subbarao, Governor, Reserve Bank of India (RBI) at the 7th International Banking & Finance Conference 2013, in Mumbai on Wednesday. Photo: Shashi Ashiwal
The Hindu D. Subbarao, Governor, Reserve Bank of India (RBI) at the 7th International Banking & Finance Conference 2013, in Mumbai on Wednesday. Photo: Shashi Ashiwal

RBI Governor Duvvuri Subbarao on Wednesday said the Reserve Bank will take a call on final guidelines for foreign banks’ subsidiarisation after government resolves pending legal and taxation issues, which he expected in the next few months.

He also said the RBI will nudge the existing foreign banks to get incorporated locally.

“The final guidelines on whether foreign banks, which roughly constitute half the commercial banks in the country today, should get incorporated locally here, will be issued once these issues are been resolved, which I hope to see in the next few months,” Mr. Subbarao told a banking conference organised by the Indian Merchants Chamber here.

At present, there are 43 foreign banks operating in the country and all of them are operating as branches without establishing subsidiaries, he said.

Only the largest by branch presence StanChart has its depository shares trading on the domestic bourses, but even then it has not adopted a subsidiary route here.

The idea that the RBI is working on is to nudge these large foreign banks with say 30 or more branches, to get incorporated locally.

There are only MNC banks — StanChart, HSBC and Citi which have more than 30 branches. Though RBS has 31 branches, it is winding down its local retail operations.

These large banks are open to the idea of local incorporation provided they get the level-playing field with the local banks and get the stamp duty waived.

“We have not come to a final decision on the issue of subsidiary model to be followed by foreign banks due to some taxation and legal issues. It’s not in the domain of the RBI, as taxation issues will be decided by the government,” the governor said.

Stating that he cannot force the existing foreign banks to get incorporated locally due to the contractual obligations, the governor said, however, new players would have to follow the subsidiary route once the government resolves the taxation and legal issues.

“The thinking at the RBI now is that the existing foreign banks, which are already operating as branches, have contractual obligations. We can’t demand them to convert into branches. For the new entrants, we might think for that policy even at the time of entry,” Mr. Subbarao said.

Listing out the regulatory and functional benefits of going for the subsidiary model, the governor said the subsidiary form provides several comforts to regulators such as better safeguards to protect the interest of depositors, greater leverage to the host country to ring-fence asset and liabilities of the bank and easy to define jurisdiction.

Since a subsidiary will have its board, including independent directors, this can provide sufficient separation between the bank and its owners to ensure that the interests of domestic depositors are not compromised, the Governor said.

Another benefit is that there will be a “clear delineation between the assets and liabilities of the bank and those of its parent and affords greater leverage to the host country to ring-fence the operations,” he said adding it is local economic conditions rather than global perspectives that drive the managerial decisions of subsidiaries.

“Finally, it is easier to define the jurisdiction whose laws would apply to the subsidiary, thereby affording more effective control to regulators in a crisis situation,” Mr. Subbarao said.

He also said globally, post the Lehman crisis, governments and regulators have been calling for more control on cross-border banks as cross-border banking transmitted the crisis ferociously across national jurisdictions, from the sub-prime U.S. markets to financial markets around the world.

“At the same time, because of the complex structures of the large cross-border banks, it became difficult to determine where in the system the risk lay and how it would transmit,” he said, adding the “problem became more pronounced where foreign banks were operating as branches rather than locally incorporated subsidiaries”.

This highlighted the importance of countries making an explicit determination of the mode of presence of foreign banks in the form of branch or subsidiary.

In short, he said the 2008 crisis shifted the bias towards domestic incorporation of foreign banks, though even pre-crisis, a number of jurisdictions mandated local incorporation of foreign banks.

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