New Delhi eyes bank reshape

India’s central bank plans to encourage foreign institutions operating in the country to set up wholly owned subsidiaries rather than merely operating as branches of overseas groups.

The Reserve Bank of India said in a discussion paper that having foreign banks set up as locally incorporated, wholly owned subsidiaries would be better for the stability of the financial system than the current structure, where they operate as branches of their overseas parents.

Local incorporation of foreign banks in India would ensure “a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring-fenced capital within the host country”, it said.

Such a structure would facilitate more “effective control in a banking crisis and enables the host country authorities to act more independently as against branch operations”, the central bank said, while a local board of directors would prioritise local interests.

Some 34 foreign banks operate in India, but all are structured as branches of overseas institutions and face many restrictions on expanding their networks.

However, according to the RBI, during the global financial crisis foreign banks – which had grown substantially in preceding years – sharply curtailed their domestic lending in India as their parent companies ran into difficulties.

As a result, foreign banks accounted for 7.65 per cent of total Indian banking system assets at the end of March 2010, down from about 9 per cent in March 2009. The five biggest foreign banks – including Citibank and Standard Chartered – account for 70 per cent of India’s foreign bank assets.

The RBI said it could not force foreign banks already operating in India to incorporate locally, but that it expected those that had become systemically important – by virtue of their size – to “voluntarily convert their branches into wholly owned subsidiaries”.

It said any bank accounting for at least 0.25 per cent of India’s total financial system assets was to be deemed systemically important.

Wholly owned subsidiaries of foreign banks would be given more favourable treatment for expanding their Indian branch networks than other foreign banks, the RBI proposed.

Local subsidiaries of foreign banks could also be given a five-year transition period to comply with India’s priority sector lending rules.

The RBI has invited feedback on its proposals.