BUSINESS

Reserve Bank of India firm on single subsidiary for foreign banks

The Reserve Bank of India is sticking by its proposal that foreign banks run their operations in India as a single wholly owned subsidiary (WoS), spurning a suggestion by overseas lenders that they be granted dual licenses.

Large foreign banks, which have so far been operating under the branch licensing norms, had approached the banking regulator for separate licenses, one for a retail subsidiary and another for corporate banking under the branch route.

However, the RBI is not keen on dual licensing and wants foreign banks to operate only under the WoS route, said people directly involved with the matter, who didn't wish to be named.

The global financial crisis of 2008 had prompted the central bank to tighten the rules that govern foreign banks in India. As a result, in 2013, RBI had released norms for setting up a wholly owned subsidiary for overseas lenders. While the central bank had not made it mandatory for existing foreign banks to convert their Indian operations into a subsidiary, the regulator had expected voluntary adoption. This was because, the RBI had assured foreign banks that subsidiaries would be treated on par with local banks, in terms of branch licensing.

While branch licensing for domestic banks has been liberalised allowing them to freely open branches subject to certain conditions, foreign banks collectively are given about 15-20 branch licences in a year.

Also overseas lenders were promised stamp duty benefits and told they would be allowed to acquire local private banks, if they opted for the subsidiary route.

However, large foreign banks like Standard Chartered, Citibank and HSBC, have so far shown little interest in adopting the WoS route.

The overseas lenders contend that converting to subsidiaries will affect their ability to find the resources to write big ticket loans since the units, unlike branches, won't be able to leverage their parent’s balance sheet.

Till now, only a few smaller lenders like DBS Bank and SBM Bank (Mauritius), have opted to convert their branches into a subsidiary.

As a middle-path, the large foreign lenders had proposed a dual licence arrangement – one for retail banking operations under the subsidiary format and another for branches to do wholesale banking, an executive from a foreign bank said on the condition of anonymity.

But the central bank isn't enthused by the idea of dual licencing because they are not convinced that foreign banks will be serious about retail operations, where margins and business volumes are low, sources said. “They may not be focussing on retail business, which is essential to increase banking penetration in the country,” said a person familiar with the matter.

The wholly owned subsidiary route was proposed mainly for protecting local retail depositors. The RBI is of the view that local incorporation provides effective control to the regulators, according to the sources.

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