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Local clients to get priority if India arm of foreign banks goes bust

This system will be a part of the contentious Financial Resolution and Deposit Insurance Bill 2017, which is under scrutiny by a joint House panel.

business Updated: Feb 05, 2018 08:18 IST
Saubhadra Chatterji and P Suchetana Ray
Saubhadra Chatterji and P Suchetana Ray
Hindustan Times, New Delhi
Foreign banks,Foreign banks in India,finance ministry
The department of economic affairs has further clarified that the resolution of the Indian branches will be done in accordance to the bill and not be subjected to provisions of the foreign resolution plan(Representational Photo)

Indian customers will have the first right over the assets of foreign banks operating in India in case of bankruptcy or any resolution action, the department of economic affairs under the finance ministry has indicated to a parliamentary panel.

This system will be a part of the contentious Financial Resolution and Deposit Insurance Bill 2017, which is under scrutiny by a joint House panel. The panel is expected to submit its report by the end of the budget session.

At a meeting of the panel, the department clarified that in case of any resolution action on the parent company in a foreign country, Indian customers will have the first right over the assets of the local arm. “The creditors of the specified service providers in India shall have first charge on the assets of the specified service provider for the purpose of resolution or liquidation under the bill,” said a ministry note.

The department of economic affairs has further clarified that the resolution of the Indian branches will be done in accordance to the bill and not be subjected to provisions of the foreign resolution plan. “It empowers the appropriate regulator to initiate resolution against a branch office of a corporate body incorporated outside India,” the note further said. Experts say this is an effort to ringfence Indian depositors. “This provision in the bill will ringfence Indian depositors against risks ,” said Kuntal Sur, partner and head of financial services risk at PwC India.

He added that currently there is no law that prevents foreign financial firms from repatriating some of the funds, unless the Indian branch has been structured as a wholly owned subsidiary of the parent company.

According to RBI records, there are currently 43 foreign banks operating in India through their branches. The list includes Citibank, Standard Chartered, Sumitomo Mitsui Banking Corporation, American Express Banking Corp and Barclays Bank Plc.

RBI data also shows the combined loans by these banks stood at Rs 3.42 trillion during 2016-17.

The resolution corporation is a new entity whose creation has been proposed by the bill which the government is keen on legislating. The bill envisages the corporation taking over some of the responsibilities of the RBI that have to do with the resolution process when a bank collapses. The body will also have jurisdiction over Indian branches of all foreign financial firms operating in the country.

“Such bank offices may be classified in the category of critical risk to viability by the appropriate regulator, and resolved in accordance with the provisions of the bill,” said a note of the finance ministry submitted to Parliament’s joint committee reviewing the bill that has been seen by Hindustan Times.

First Published: Feb 05, 2018 07:36 IST