RBI mulls changes in regulations for foreign banks

Last Updated 24 October 2010, 15:40 IST

As per the new regulations being mulled over by it, the central bank might ask the foreign banks to incorporate all their branches as their subsidiaries in India so that all of them are required to follow the rules governing capital adequacy ratio and sector-specific exposure limits and the Reserve Bank can have a greater regulatory oversight, sources said.

RBI is believed to have taken up the matter with the Finance Ministry and could come out with a discussion paper on the draft guidelines after getting a go-ahead from the government, they added.

Sources said that local incorporation of the foreign banks' branches here would also help define them as Indian subsidiaries of foreign institutions or banks controlled and managed by overseas entities.

This would, in turn, help differentiate the Indian lenders such as ICICI Bank and HDFC Bank, where the majority shareholders are overseas entities, from foreign banks.

The new regulations would describe these Indian lenders as 'Indian-managed' banks, despite them being foreign-owned in terms of their shareholding patters.

As per the new FDI norms announced by the government last year, ICICI Bank and HDFC Bank have been labelled as 'foreign-owned' despite being controlled by Indians and having their roots in the country. This is because of more than 74 per cent equity in these banks being held by foreigners.

After this categorisation, the ICICI Bank MD & CEO Chanda Kochhar had said that they continue to work as an Indian- managed bank and hoped that a clarification would emerge soon on the whole issue.

HDFC Bank chief Aditya Puri had also said earlier that HDFC Bank remained an Indian bank with majority of voting rights vested with Indians.

Regarding the local incorporation of bank branches as wholly owned subsidiaries, the RBI has so far found favourable response from the foreign banks and their only concern has been regarding any possible tax implications arising out of the change of their existing branches into new structure, sources said.

The foreign banks can get more leeway, or even a free hand, in terms of number of branches they wish to open in the country, under the local incorporation route, as against the current practice of seeking RBI's clearance for every branch to be opened, sources said.

In return, the foreign banks might be asked to open more branches in rural areas to meet the financial inclusion targets.Among others, the local incorporation of foreign bank branches will also help insulate them against crisis in the other countries where these banks might be operating, sources said.

While the foreign banks already operating in the country have been lobbying for liberalising these branch-licensing norms for a long time, a number of other overseas players are also lining up for licences to enter the Indian banking space.
There are about 32 foreign banks present in the country with their little over 300 branches.

However, this accounts for less than 0.5 per cent of about 72,000-branch overall network of all the banks operating in the country.

(Published 24 October 2010, 06:25 IST)

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