The Reserve Bank of India is moving closer to making subsidiarisation of foreign banks' operations in India a reality by making it mandatory for new international banks to commit in writing their willingness to convert into a local unit when Indian regulations change.
MUMBAI: The Reserve Bank of India is moving closer to making subsidiarisation of foreign banks' operations in India a reality by making it mandatory for new international banks to commit in writing their willingness to convert into a local unit when Indian regulations change.
The central bank has made this a precondition for at least two international banks - National Australian Bank and Westpac Banking Corp, said two people familiar with the latest licensing conditions for foreign banks seeking to begin operations in India.
"Branch banking licenses to some Australian and Chinese banks in the recent past have a clause that states the bank would have to migrate to the wholly owned subsidiary model as and when the Reserve Bank finalises the guidelines," said one of the persons, who did not want to be identified.
The action, coming more than two years after the RBI first signaled its intention to ask foreign banks to incorporate local units to ring-fence them from global risks, may well be a significant step in the banking regulator's key unfinished task of ensuring financial sector stability.
The government has allowed a one-time exemption from tax if branch offices of foreign banks convert into a local company, removing a major obstacle to conversion.
All international banks in the country, from Standard Chartered to Citigroup, operate as branches of their overseas parents, leaving them exposed to the weaknesses of the parent company.
Bank branches are currently not separate legal entities, and hence do not have a specified capital base or a board of directors. But once they are incorporated as subsidiaries, these units will have their own capital base and give the banking regulator a better handle in monitoring risks.
"From a regulatory perspective, if the RBI wants to reserve the regulatory right to ask banks to migrate to the subsidiary model, it is not wrong," said Bobby Parikh of BMR Advisors. "Foreign banks operating in India are not keen on subsidiarising as the capital of the parent (company) gets blocked. The capital calculation for the parent changes under the subsidiarisation model. Under the branch model, however, it's floating capital and can be moved out by the parent as and when required."
The Reserve Bank of India turned wary of international banks after they shrunk operations in India post the 2008 financial crisis, when their parent companies had to be bailed out with taxpayer funds. The regulator felt that during times of crisis it may be difficult to protect local depositors' interests.
"It is generally understood that with a branch it may be difficult to determine the assets that would be available in the event of the bank's failure to satisfy local creditors' claims, and the local liabilities that can be attributed to the branch," said a discussion paper by the Reserve Bank of India in January 2011.