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RBI prefers subsidiary route for foreign banks

The Reserve Bank of India (RBI) wants subsidiary route for foreign bank’s expansion in India as against the current system of having presence via branch network.

india Updated: Jan 23, 2011 22:36 IST
HT Correspondent

The Reserve Bank of India (RBI) wants subsidiary route for foreign bank’s expansion in India as against the current system of having presence via branch network.

The regulator in a discussion paper released on Friday suggested that foreign banks should be incentivised to operate in India as wholly-owned subsidiaries.

The discussion paper, on which RBI has invited comments from stakeholders by March 7, said: “On balance, the subsidiary model has clear advantages over the branch model despite certain downside risks ...There may be a need to incentivise subsidiary form of presence of foreign banks”.

Experts say that RBI’s view is a result of the recent global financial crisis.

“RBI discussion paper on the presence of foreign banks seems to be guided by concerns in the aftermath of the global financial crisis when many of the large global banks struggled and disposed assets to raise capital,” said Ashvin Parekh, national leader, global financial services, Ernst & Young. “It is perhaps also a reflection of global practice of supporting domestic banks as witnessed in the recent crisis.”

Under the wholly-owned subsidiary (WOS) form, a foreign bank will have to operate as a locally incorporated legal entity and would be subject to the domestic laws like the Companies Act and Banking Regulation Act. With regard to repatriation of profits by foreign banks, it said the WOS be allowed to pay dividend to the parent bank, like the domestic banks.

Although the RBI had initiated two-phased banking reforms in March 2005, it had to abandon the second phase beginning 2009 in view of the global financial crisis.

The paper said that although the RBI permitted foreign banks to convert into WOS in 2005 itself, no banks opted the conversion. In order to encourage existing foreign banks to convert into WOS, the discussion paper said the subsidiaries should be given preferential treatment for opening of branches as compared to those foreign banks, which operate through branches.

“With a view to creating an environment for encouraging foreign banks to set up WOS, a less restrictive branch expansion policy, though not at par with domestic banks may be envisaged,” the paper said.

The paper also said although WOS cannot be treated at par with domestic banks, they might be allowed to raise rupee resources through non-equity capital instruments.