India has unveiled new rules for foreign banks, which could result in them being treated almost like local lenders and help their expansion in the country.
The new framework from the Reserve Bank of India (RBI), is designed to make it easier for foreign banks to open branches in India and potentially take over local companies if they set up wholly owned subsidiaries in the country.
“As a locally incorporated bank, the wholly owned subsidiaries will be given near national treatment,” the central bank said. It added that foreign banks under this structure would “be able to participate fully in the development of the Indian financial sector”.
Foreign banks currently operate in India as branches rather than subsidiaries. The new system would allow them to have a separate capital base and a local board of directors.
The RBI hopes that a move to such a structure could help to mitigate risks from overseas firms in the country’s banking system.
“The global financial crisis of 2008 has shown that the growing complexity and interconnectedness of financial institutions … have compromised the ability of home and host authorities to cope with the failure of too big to fail and too connected to fail institutions,” according to the RBI.
The central bank added it was considering whether foreign bank subsidiaries would be allowed to buy private sector banks in India.
“The issue of permitting wholly owned subsidiaries to enter into M&A [mergers and acquisitions] transactions with any private sector bank in India subject to the overall investment limit of 74 per cent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks,” the RBI said.
Analysts noted that decisions made by foreign banks following the new rules would take time, as they look for further clarification.
“We opine that foreign banks’ conversion into wholly owned subsidiaries would be slow and gradual,” according to Karvy Stock Broking.
“However, from a sentiment perspective we could see some gains in small cap [capitalised] private sector banks like Ing Vysya Bank, Karur Vysya Bank, City Union Bank, South Indian Bank, Karnataka Bank et cetera which can be considered as takeover targets.”
Foreign lenders account for a small minority – less than 0.5 per cent – of branches in India, where the market is dominated by state banks. The number of licences issued to foreign firms for new branches has been heavily restricted. One of the biggest foreign banks in India, Standard Chartered, has 99 branches across 42 cities in the country, where it has been operating for more than 150 years.
Standard Chartered said that although it welcomed the new rules, it was “too early to comment in detail without reviewing the guidelines and its implications”.
HSBC and Citibank, which did not issue comments on the rules, are the other two major foreign banking companies that operate in India.
Expansion of the foreign banks in the country would still be capped as it deemed necessary, the RBI said.
“To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size,” RBI said.
It specified that foreign banks which had “complex structures” and “banks which do not provide adequate disclosure in their home jurisdiction” would be among those that would only be allowed to enter India as wholly owned subsidiaries.
Foreign banks which started their operations in India before August 2010 would have the option to continue their banking business through the branch mode, however, it added.
The announcement came as the economy remains under pressure from slowing growth, high inflation, and wide deficits.
The ratings agency Standard & Poor’s yesterday warned that the outcome of the general elections, to be held by May, would be key in determining whether India would lose its investment grade rating or whether the agency would revise its outlook for the country from “negative” to “stable”.