India issues rules allowing expanded foreign bank presence

Reuters

By Subhadip Sircar

MUMBAI, Nov 6 (Reuters) - India's central bank said it willtreat foreign banks operating in the country on nearly equalterms with local lenders if they move to a wholly ownedsubsidiary structure, as it seeks to bolster its regulatorypowers in the wake of the global financial crisis.

The rules issued by the Reserve Bank of India (RBI) late onWednesday were generally in line with expectations and couldexpand opportunities for international banks in the country, since they would have greater freedom to open branches and wouldbe able to participate more fully in the development of theIndian financial sector.

However they could also face a greater regulatory burden.

Currently foreign banks in India with substantial networks -a category including Citigroup, HSBC, andStandard Chartered - operate as branches, notsubsidiaries, a distinction which crucially affects theirregulatory framework.

Foreign-owned banks operating as subsidiaries would berequired to earmark 40 percent of their lending to the "prioritysector," which includes underserved parts of the economy andagriculture, the same obligation as for domestic banks and inline with a rule being phased in for existing foreign banks with20 or more branches.

However, foreign banks would only be allowed to buy a localprivate-sector lender after a review of the overall extent offoreign bank penetration.

To prevent foreign domination of the banking sector, thecentral bank also said it would place restrictions on thefurther entry of new wholly owned subsidiaries of foreign banksif and when the assets of institutions owned abroad exceed 20percent of the country's total.

India's banking system is dominated by state banks, whichaccounted for more than two-thirds of the sector's assets at theend of March 2012, the latest RBI data showed. Foreign banksaccounted for 4.3 percent of deposits as of March 2012.

The RBI said foreign banks wanting to enter the country buthaving what it regards as over-complex structures, a lack ofadequate disclosure or lacked a broad enough spread ofshareholders would be allowed entry only as wholly ownedsubsidiaries.

Foreign banks operating in India before August 2010 have theoption of continuing as branches. "However, they will beincentivised to convert into WOS (wholly owned subsidiaries)because of the attractiveness of the near-national treatmentafforded to WOS," the central bank said in a statement.

"We welcome the new guidelines from the regulator. Howeverit is too early to comment in detail without reviewing theguidelines and its implications," a Standard Chartered spokesmansaid.

A Citi spokesman in India could not be immediately reachedfor comment, while HSBC declined comment.

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