The Reserve Bank is likely to make it mandatory for foreign banks in the country to operate as wholly-owned subsidiaries, in line with the international practice, so that the central bank can have better control over their working.
Initially, according to sources, the new banks and the existing ones with a few branches will be asked to convert into wholly-owned subsidiaries (WoS).
The larger banks, they said, could be given some more time to adhere to the guidelines that are likely to be announced by June-end. At present, the foreign banks operate through their branches.
Under the WOS model, the foreign banks will be required to set up a subsidiary under the Companies Act and operate as an Indian entity. Sources said that in several countries, including the US and Singapore, it is mandatory for banks to operate as WOS.
In order to align Indian laws with the international best practices, the RBI had come out in January with the draft guidelines on the mode of operations for foreign banks in India. At present, foreign banks like Citi, Standard Chartered and HSBC operate as branches, mainly in bigger cities, and do not have the freedom to expand like the banks incorporated in India.
In its discussion paper, the RBI has said that it expects large banks to convert them from branches to WOS and that the banks who adopt the subsidiary model would be given preferential treatment for opening of branches. The RBI has further called for making it mandatory for foreign banks with more than 0.25 per cent share in the Indian banking industry to convert themselves from a branch into a WOS.
It points out that the government has clarified that a company with a foreign holding of over 50 per cent is a foreign company. At present, there are 34 foreign banks operating in India, with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the the total asset size. The discussion paper also said the WOS may be allowed to raise rupee resources through non-equity capital instruments.