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Economy

RBI Lets Foreign Banks Expand Through Subsidiaries

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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)

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