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Economy

RBI Lets Foreign Banks Expand Through Subsidiaries

RBI releases guidelines for foreign banks to become fully owned subsidiaries in India. This is likely to mean that banks like Citi, Stanchart and HSBC, which have reasonably large operations in India, will have to become subsidiaries to operate further.

The guidelines need banks that have more than 0.25% of banking assets convert to Wholly Owned Subsidiaries (WOS). The bank system currently has around 80 lakh crores or so as assets, so any bank with assets of over Rs. 20,000 cr. will require registration. Also, RBI has decided that banks of countries with inadequate regulation, those with complex holding structures, those not held “widely”, or from countries where Indian deposits are not on par with the home country deposits will have to become subsidiaries. The subsidiary is an entity registered in India and will come under full RBI regulation.

Such subsidiaries:

  • Must have a capital of Rs. 500 cr. (5 billion)
  • If they already have a branch network, they can use the branch’s capital, but otherwise money has to be brought in.
  • Capital adequacy ratio of 10% (1% higher than others)
  • Must lend 40% to priority sector as per regulation
  • Must open branches in unbanked areas (Tier 5/6) and follow branch norms. This is better than current (<10 branches only) and it is a level field with other banks.
  • Must have 50% Indian directors, 1/3rd should be Indians resident in India.

Most importantly, foreign banks have been allowed to acquire Indian banks (with permission). This should make certain small Indian banks attractive and some are privately owned.

Many of these banks are public and it might be interesting to create a portfolio of such banks, betting on an acquisition. Think Karnataka Bank, South Indian Bank, Karur Vysya Bank etc. (But a proper analysis needs to be done about their Capital Adequacy ratios and current branch network)

  • Rajiv says:

    Hi Deepak, If you see point 2d on page 3, Foreign banks which commenced banking business in India before August 2010 shall have the to continue their banking business through the branch mode..Why would the big Foreign banks in India convert to a WOS and then comply with RBI mandates like priority sector lending etc?

  • Leo says:

    THIS is gold bullish and silver bullish… long term coz the banking system will be more unstable.
    The problem with india is not Banking but efficient banking.Great well done IMF rajan and LUNGY swamy.

  • dear sir
    nothing will really happen.
    this is typical indian trait.
    we mix quite a lot of ingredients
    and match them in a such way that
    dish will have no taste.
    neither sweet nor sour. neither pungent
    nor soothing.
    let us call it balanced.
    the latest attempt to favour the dish
    was probably the nuclear deal . but
    that too has probably turned tasteless now
    so a big zero sum exercise. this too
    all the best