The long-awaited policy framework for foreign banks to operate more freely in India was released by the Reserve Bank of India recently. At the core of the new policy is the preferred organisational structure for them. They will be encouraged to opt for the wholly owned subsidiary (WOS) model and be incorporated in India. In return, the WOS is promised near national treatment — being able to open branches anywhere on a par with Indian banks and participate in the development of the Indian financial sector. Foreign banks that have been operating branches in India for long are encouraged to switch to the WOS model. The principle of reciprocity will guide the RBI. A minimum capital of Rs.500 crore has been fixed for each wholly owned subsidiary of a foreign bank. For the RBI, regulation of foreign banks, especially from the perspective of financial stability, will become easier. To forestall the possibility of foreign banks dominating the Indian financial sector, certain restrictions are being placed if they grow above a certain size, They will adopt corporate governance norms, which are generally in line with what are applicable to the Indian corporate sector, except that there will be a compulsion to appoint Indian nationals on their boards of directors up to a certain proportion. The WOS will have to meet the priority sector lending requirement of 40 per cent on a par with domestic banks.
The government and the RBI envisage a productive role for foreign banks in India subject to their following certain prescribed norms. It is no coincidence that the RBI has stipulated similar requirements, such as in capital adequacy, for the new private banks that are to be licensed shortly. However, while the imminent entry of new banks, especially those promoted by large corporate houses, has been highly controversial, the expansion of foreign banks’ footprint in the country is likely to be more subdued. After the road map was unveiled, leading banks of the world are adopting a wait-and-watch attitude. A few of the big ones who have had branches in the country for more than 100 years are reportedly reluctant to convert to the WOS model given all the restructuring it entails. That is not surprising, given that the ethos of the foreign banks was not oriented towards activities such as lending to small and medium enterprises and agriculture. Over their long years in India most of them have grown at a snail’s pace. Regulatory restrictions have often been given out as the excuse. Finally, as with new private banks, expectations from the foreign banks — in the evolution of India’s financial sector and in financial inclusion — are highly exaggerated.