RBI’s sop for foreign banks to turn ‘local’
Oct 29 2013 , Mumbai
Such conversion will be guided by the principles of reciprocity and single mode of presence. The net worth of a wholly-owned subsidiary will be Rs 500 crore.
RBI governor Raghuram Rajan told media on Tuesday: “The idea is to move each systemically important foreign bank into a locally-owned subsidiary.”
“This is an important control function. When you don’t do that, transactions of the parent are not transparent,” he said.
For example, the CEO of an investment bank which was in deep trouble in 2008 had told me that he got a call from the parent in the US ‘to transmit all your funds back to New York tomorrow’.
There was a very near-danger that the guy could transmit the Indian funds back to New York. So the CEO called RBI and asked if he could do this? RBI obviously said no, as it protects funds of Indian investors,” said Rajan.
“But the worry is that with the branch situation, there are some countries, for example, which give preference to their own depositors. So they will get paid before your depositors in foreign countries. There are countries that prescribe that a branch sends back money to the parent. We thought this is illegal, as Indian claimants will have to stand in a line in case of bankruptcy that has happened in London or New York or somewhere else. So our sense is that if there are systemic big players or if there are things that require the banks to have depositor preference, we will prefer them to be domestically incorporated,” added Rajan.
“We can give them an incentive, and the incentive we have given them is a national treatment on a reciprocal basis. We will like them to get the privileges that Indian banks enjoy but also some safeguards to ensure that we don’t become a foreign bank-dominated economy,” he said.
“While it may not be mandatory for existing foreign banks (i.e., banks set up before August 2010) to convert into wholly-owned subsidiaries, they will be incentivised to convert into such subsidiaries by the attractiveness of the near-national treatment,” he added.
RBI had floated a discussion paper on the presence of foreign banks in India in January last year, factoring in the lessons from the global financial crisis which favoured a subsidiary mode of presence from a financial stability perspective.
Joiel Akilan, executive director and chief representative of Spanish bank BBVA, which has a representative office in India, said, “It is a good opportunity for foreign banks to increase retail presence in India. However, each bank will have its own strategy based on its business model.”
Speaking to the Wall Street Journal, Abhijit Sen, chief financial officer of Citibank, said the process of conversion from a branch into a wholly-owned subsidiary had several implications and the details of the new rules must be weighed before any decision.
There are more than 40 foreign banks in India. Under a WTO agreement, RBI is mandated to allow a total of just 12 new branches to foreign banks each year.