Wednesday, November 6, 2013

Foreign banks can buy private banks

The Reserve Bank of India (RBI) will treat foreign lenders in the country on par with their domestic peers provided they convert into wholly owned subsidiaries (WOS).

Reciprocity with the home country of the parent bank is one of the major factors that RBI would consider before approving the WOS structure. This means, it would look at the treatment given to Indian banks in the home country of the foreign bank.

The RBI on Wednesday detailed the framework for setting up a WOS in India. This comes almost three years after the release of discussion paper on the subject. The minimum paid-up capital should be Rs 500 crore.

While foreign banks that got licences before August 2010 have the option to continue with their existing structure, they might find the new format lucrative in order to expand their business in India.

Once converted, foreign banks would be free to open branches in India without prior approval of the banking regulator except in case of sensitive areas. The regulator also indicated that WOS' may be permitted to enter into mergers and acquisition transactions with any private sector bank in India, subject to the overall foreign investment limit of 74% and other regulatory approvals.

These relaxations come with riders.

"Not less than 50% of directors should be Indian nationals or NRIs or PIOs, subject to the condition that one-third of the directors are Indian nationals resident in India," said RBI.

The WOS will have to make sure that at least 25% of the total number of branches opened during a financial year must be opened in unbanked rural areas.

The WOS will have to comply to the priority sector norms on par with domestic banks, which includes agriculture lending of 18% of adjusted net bank credit (ANBC). Presently, foreign banks with less than 20 branches in India need to allocate only 32% of ANBC to priority sector as against 40% in the case of those with larger presence.

"RBI has cleared the air on preferential treatment, priority sector lending and governance issues that were raised on the draft norms," said Ashvin Parekh, managing partner, APAS LLP, and senior expert advisor, EY.

At present, there are 47 foreign banks with 327 branches in India. 46 other banks only have representative offices in India. With 101 branches, Standard Chartered Bank has the largest presence in India, while Citibank has the biggest asset base.
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