RBI TELLS FOREIGN BANKS TO TAKE COUNTRY ROADS

The government and the Reserve Bank of India, or RBI, will nudge foreign banks in India to operate in unbanked areas and relatively small towns like their local counterparts, in new rules for conversion of their existing branches here to fully-owned subsidiaries.

The proposed draft guidelines which are expected to be unveiled shortly will encourage foreign banks, which wish to commence business here and all those already operating in the country, to open branches in what is known as Tier III-VI cities — far away from the major metros where most of these banks focus on, besides the hinterland, said two people familiar with the policy discussions.

This will be consistent with the efforts of the government and the RBI to achieve greater financial inclusion — to ensure banking access to every household in India. Foreign banks in India were hoping for a liberal treatment in terms of branch expansion in a fully-owned subsidiary regime, hoping to expand in some of the major metros and towns, but policy makers here are of the view that if local banks have to fulfil commitments to ensure greater banking access, foreign banks will also have to play by the same rules. Besides, both RBI and the government are mindful of reciprocal treatment from foreign regulators when Indian banks seek to expand overseas.

Last year, RBI liberalised the branch licensing policy for Indian lenders allowing them to freely open branches in cities with a population of less than 50,000. The central bank wants these banks to open at least one-third of new branches in such locations where there is limited access to banking. It is quite likely that foreign banks may also be allowed freedom to expand in such locations, a senior government official said. That will pose a challenge to foreign banks, considering that their share of retail assets is low, with bulk of their businesses being accounted for by India’s bigger corporates. State-controlled banks are the ones with a wider presence in rural areas and semi-urban towns. Private banks are now being pushed to bridge this gap.

Over 30 foreign banks in India, led by some of the biggest names — Citi, HSBC , Standard Chartered — operate through branches, but regulators here, like their global counterparts, want to make it mandatory to convert their branch operations into subsidiaries. This approach was first outlined in 2005, but after the financial meltdown, globally, regulators are leaning in favour of foreign banks incorporating locally to ensure greater regulatory control and to help cushion the blow in the event a crisis hits the parent bank.

RBI governor D Subbarao had said in April that apart from easing the resolution process, the wholly-owned subsidiary structure would provide greater regulatory control and comfort to host jurisdictions. Foreign banks have already represented to RBI seeking what they term as a level-playing field. But an official involved with the process said that a liberal regime for opening branches may well be considered for those foreign banks which choose to kick off operations in excluded or unbanked areas. “Logically, the policy should encourage expansion in areas to boost financial inclusion. Foreign banks anyway get a favourable treatment in terms of fulfilling priority sector norms. They can’t have a free lunch,” the official said.

Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/RBI-tells-foreign-banks-to-take-country-roads/articleshow/6726440.cms