Foreign banks that want to set up operations in India will have to do so through an independent subsidiary. This means they cannot operate as a branch of the parent bank.
The Reserve Bank of India has announced new guidelines with a view to ring-fence the local operations of foreign banks from adverse developments in their home countries.
However, the RBI will allow some foreign banks to operate in India as a branch of their parent bank.
The wholly-owned subsidiary (WOS) model will be compulsory for banks which have complex structures, are perceived as systemically important and belong to jurisdictions which give preferential treatment to deposits of home country.
Currently, foreign banks as a group are entitled to open 12 branches in India every year, according to WTO commitments. India has usually allowed a higher number.
The new dispensation will probably help foreign bank branches proliferate — provided, of course, their countries have reciprocal arrangements for Indian banks in their territories.
Old foreign banks that set up shop prior to August 2010 (such as Citibank, HSBC, Standard Chartered and DBS) will have the option to continue operating as a branch of their foreign parent, but they will be “incentivised” to convert into WoS.
To prevent foreign banks from dominating the banking system, the RBI said that it will put in place certain restrictions. Requiring foreign banks to get RBI’s prior approval before getting liquidity infusion from their parent bank would be one such condition.
The initial minimum capital for a WoS will be Rs 500 crore, which foreign banks would need to bring upfront; this applies to even existing foreign banks which wish to convert.
Further, the RBI said that the WoS will be required to meet Basel-III requirements (9 per cent Tier-I capital) right from Day One. For the first three years, the WoS will have to maintain Tier-I capital at 10 per cent.
The Priority Sector Lending (PSL) requirement will be 40 per cent for WoSs, such as domestic scheduled commercial banks. Existing foreign bank branches converting into WoS will be given “adequate” time to comply with the PSL targets.
Branch Operations
On opening of new branches, the RBI has sought to bring the WOSs on a par with domestic banks.
They will be allowed to open branches in Tier 1- centres without taking prior permission from the RBI provided at least 25 per cent of their branches are opened in un-banked rural centres (Tier 5 and Tier 6).
Board of Directors
The RBI also mandated that at least a third of the directors should be independent of the management of the subsidiary in India, its parent or associates. It also wants at least a third of the directors to be Indian nationals resident in India.