Foreign banks keen on differentiated licence

More than one foreign lender seem game for the central bank's idea

The Reserve bank of India (RBI)’s proposal to issue differentiated banking licences appear to have caught the imagination of foreign banks.

The RBI’s guidelines on subsidiarisation didn’t really excite foreign lenders in the country. However, Bankers say several mid-sized foreign lenders are keen to apply for such a licence, as and when RBI decides to offer these. “Of the 43 foreign banks in India, only four or five are engaged in full-fledged banking. The rest are doing specialised banking business, though they have been given a universal banking licence. It makes sense for them to opt for a differentiated banking licence and maintain focus on their core activity. We are certainly open to this idea,” said a banker with a mid-sized foreign lender, requesting anonymity.

He declined to be identified as it was not clear if RBI will allow foreign banks to opt for a differentiated banking licence without creating a subsidiary in India.

RBI Governor Raghuram Rajan, during a seminar last week, said the central bank had opened the possibility of creating a differentiated banking licence, one allowing banks to operate in niche areas.

Earlier, the RBI’s guidelines on subsidiarisation didn’t really excite foreign lenders in the country.

Background
In October, 2007 RBI had prepared a discussion paper on differentiated bank licensing. It had stated the case for such licensing may be reviewed after a certain degree of success in financial inclusion was achieved and the central bank was satisfied with the quality and robustness of the risk management systems of the entire sector.

RBI, in a discussion paper on the banking structure in India (August 2013), said banks had shown significant progress in financial inclusion and in improving the quality of risk management. However, adding “a lot more needs to be done.”

Possible takers
While Rajan made his comment of last week with reference to the new banking licences offered to domestic entities, the differentiated licence model appears to find favour with some foreign banks. UBS, which has decided to surrender its banking licence in India, is one. “India is still very important to us. If differentiated licensing comes in, and if we are able to do what we think we are good at, then we will certainly reconsider those options to re-engage in businesses in India," Aashish Kamat, managing director and chief executive of UBS in India, had told Business Standard in a recent interview.

Sectoral sources say Barclays could be another candidate for such a licence. Barclays had exited its retail operations in India in December, 2011, barely four and a half years after starting it. A spokesperson of Barclays in India declined to offer comment.

“I think there is a lot of merit to a differentiated banking licence model. All banks do not want to do every business. Different banks have different expertise and a differentiated licence will suit them (foreign banks),” said Brijesh Mehra, managing director and head of international banking, India and South East Asia, at Royal Bank of Scotland.

Clarity

Sector analysts and bankers say subsidiarisation could be a hurdle for foreign banks in opting for a differentiated banking licence. While RBI wants foreign banks to set up wholly-owned subsidiaries in India, it has not made it compulsory for the lenders to create one. “Not many foreign banks are interested in creating a subsidiary here. It is not clear whether foreign banks have to set up subsidiaries first to be eligible for a differentiated licence,” said a banker.

He added that priority sector lending norms also needed to be relaxed to encourage foreign banks to opt for a differentiated licence. “The final guidelines will probably offer some clarity,” the banker said.