RBI allows foreign banks to buy private banks: What you need to know

Is Governor Raghuram Rajan bringing about a transition in the conservative RBI? His swift moves may seem so.

Three years after it published its first discussion paper on norms governing foreign banks, the central bank has come out with final set of a guideline. The new norms are a hailed as positive for both foreign and domestic banks.

Whatever, the reaction of the banks is, no doubt that the norms bring about a much-needed clarity. They clear the path for those willing to expand in India.

Here are a few facts about the new norms:

The key norms

* Systemically important foreign banks, or those with asset base of 0.25 percent of the all commercial bank assets, will have to convert to wholly owned arms. According to a report in the Mint, this would mean Bank of America Corp., Barclays Plc, Citibank, Deutsche Bank AG, HSBC, DBS Bank Ltd and Standard Chartered Plc will become subsidiaries of parent companies.

* No deadline has been set for this conversion.

* Once they become subsidiaries, they will be treated almost like local lenders. The norms expand opportunities for international banks in India. They get greater freedom to open branches. But this would also mean that they conform to the regulatory framework of the local banks. They will have to earmark set aside 40 percent of their lending to the priority sector, which includes agriculture.

* There are tight restrictions too. Foreign banks wanting to enter the country but having what it regards as over-complex structures, a lack of adequate disclosure or lacked a broad enough spread of shareholders would be allowed entry only as wholly owned subsidiaries.

* Apart from this, the permission to acquire a local private sector bank will be given only after a review of the overall extent of foreign bank penetration in the country. Once the assets under foreign-owned entities exceed 20 percent of the country’s total, the RBI restrict entry of new wholly-owned subsidiaries.

* However, foreign banks operating in India before August 2010 have the option of continuing as branches. The RBI, however, hopes the near national treatment will encourage them to convert to wholly owned subsidiaries.

Reactions

* Foreign banks are yet to react and sector experts are also cautious. “We welcome the new guidelines from the regulator. However it is too early to comment in detail without reviewing the guidelines and its implications,” a Standard Chartered spokesman has been quoted as saying. Analysts and sector experts are hailing the development.

* Robin Roy of PwC told CNBC-TV18 that more clarifications are required on wholly owned subsidiary rules. However, he has been quoted as saying in the Mint report that foreign banks’ grouse of not being able to open more branches should end now.

Facts

* State-run banks manage about two-thirds of the aggregate assets of the Indian banking system. As much as 4.3 percent of total deposits is with foreign banks.

* Among the foreign banks already present, Citibank has the largest asset base. It has 43 branches in the country, saysthe Mint report. StanChart, meanwhile, has 100 branches, HSBC 50, Deutsche Bank 17 and DBS 12 branches.

With inputs from Reuters