The RBI, in its discussion paper on the presence of foreign banks, has said that all new overseas entrants in the Indian banking space will have to locally incorporate themselves.
"New entry norms will require systemically important foreign banks — those with a share of more than 0.25 percent of banking assets — to mandatorily convert themselves from a branch into a wholly owned subsidiary," it added.
There are 34 foreign banks in India. All operate through branches. Although they have been allowed to establish subsidiaries none of them have taken that option yet.
Under a 1997 World Trade Organization agreement, total assets of foreign banks in India cannot exceed 15 percent of the total banking system. But RBI, in its discussion paper, has changed the limit in terms of capital and reserves of banks.
On capital adequacy for new players, RBI said subsidiaries of foreign banks will be treated at par with new private sector banks and shall maintain a minimum capital adequacy of 10 percent of their risk-weighted assets.
India's apex bank also said it may allow them to raise rupee resources in the form of non-equity capital, adding that it will extend a "less restrictive branch expansion policy" to foreign players by allowing them to operate in semi-urban areas. Currently, only local banks can tap the domestic capital market.
Noting that it may not be possible to mandate conversion of existing players into subsidiaries, RBI said: "The regulatory expectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants would opt for converting their branches into wholly owned subsidiaries."
RBI said once the policy is in place, it will be more liberal in its branch licensing policy, but it is difficult to award "full national treatment" to foreign banks because this "could lead to unintended consequences for the banking sector".
However, foreign banks will be treated virtually on par with their domestic peers in terms of branch expansion regarding which the banking regulator has all along been following a restrictive policy.
India had been focusing on consolidating its domestic banking system over the past five years but the RBI said the next phase of expansion will see foreign banks' role "gradually enhanced in a synchronised manner".
The RBI paper said that wholly owned subsidiaries may be allowed unrestricted expansion in tier 3, tier 4, tier 5, and tier 6 cities. "Tier 1 and tier 2, they will have to come for branch licenses like private banks and scheduled commercial banks do," it said.
"That's a fairly important incentive. They will have to come and have priority sector obligation like 40 percent, but some leeway would be given. The priority sector would be like 32 percent and they would be allowed to treat export finance as part of priority sector," the RBI said.
The share of foreign banks in total banking assets stood at 10.52 percent in India, out of which that of the top five was 7.12 percent as of March 31, 2010, RBI said, adding that among these, Citibank had 1.6 percent of the total assets of the banking system, while that of HSBC held 1.52 percent and Standard Chartered Bank 1.5 percent.
