The Reserve Bank of India ( RBI )) is dangling the carrot of near level-playing field to foreign banks such as Citigroup and HSBC , if they convert into wholly-owned subsidiaries which is essential for systemic safety, instead of functioning as parents’ branches, leaving room for instability.
MNC banks would be allowed to set up branches at their will in smaller cities, barring some security-sensitive regions, and list their shares on stock exchanges with at least 25% Indian holding, said a central bank discussion paper on Presence of Foreign Banks in India.
Global banks would have a minimum capital adequacy ratio of 10% and lower priority sector lending target than domestic private peers.
Their export finance will be treated as lending for the priority sector, and agriculture sub-target could be 10% instead of 18% for the rest. They would be allowed to raise debt-rupee resources as capital.
Foreign bank branches would be considered to be systemically important to be converted into subsidiaries once their assets touch 0.25% of the total banking assets as on March 31 preceding year, it said. The central bank retains the right to introduce curbs, if the total assets of foreign banks constitute a fourth of the total industry. The argument in favour of subsidiaries is strengthened after the 2008 credit crisis showed that being globally big need not necessarily be a comfort for small depositors.
India planned to expand the role of foreign bank presence since 2005, but had to put that in abeyance after the financial crisis sunk many global banks. Now, that markets are relatively stable, the central bank is proposing bigger role for them with adequate safeguards.
There are 34 foreign banks operating in India as branches, accounting for 7.65% of total banking assets as on March 31, 2010, up from 9.03% a year ago. If credit equivalent of off-balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%.
Other norms for subsidiary include banks incorporated in a jurisdiction that has legislation which gives deposits made or credit conferred, in that jurisdiction a preferential claim in a winding up; banks which don’t provide adequate disclosure in the home jurisdiction; with complex structures; which are not widely held. The paper falls short of giving foreign banks the level-playing field fearing instability when their parent companies are in trouble.
At the peak of credit crisis, foreign banks had withdrawn from the Indian credit markets when year-on-year credit declined 7.1% as on July 3, 2009 and fell 15.9% as on October 9, the same year.
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