Foreign banks to gain from subsidiarisation route: Deloitte

RBI said that foreign banks with complex structures which do not provide adequate disclosure would have to operate in India only through wholly-owned subsidiaries

The Reserve Bank guidelines for foreign banks to operate through wholly-owned subsidiaries in India is a step in the right direction as they play an important role in economic growth, a study said.

"Considering the capital required to fuel economic growth, foreign banks have to play a significant role along with new private sector banks to cater to growing credit demand," Deloitte said in a report.

In a bid to better regulate them and avoid 2008-type crisis, RBI earlier this month said that foreign banks with complex structures which do not provide adequate disclosure would have to operate in India only through wholly-owned subsidiaries (WOS).

The guidelines incentivise foreign banks operating in the country with 'near national treatment' if they become WOS, enabling them to open branches anywhere at par with other public and private sector banks.

The regulator also allowed foreign banks to list their subsidiaries on the local stock exchanges.

On Tuesday, RBI said that foreign banks converting into WOS from the predominantly branch model they follow currently, will also get capital gains tax and stamp duty exemptions.

"Foreign banks have the advantages of developing a rupee balance sheet as well as look at faster organic as well as inorganic growth besides getting an opportunity of getting listed on Indian exchanges," the report said.

The RBI framework provides an opportunity for foreign banks to evaluate their preferred structure of doing business based on their capital commitment, business plan and long term aspirations for the Indian market.

There are 45 foreign banks in India with a network of 333 branches as of March 2013, most of which are held by the top three -- StanChart (100 branches), HSBC (50) and Citi (40).

Their market share stood at 6.5% of  total banking assets in FY13.

The initial minimum paid-up equity capital or networth for a WOS should be Rs 500 crore, RBI had said.

However, RBI gave to those foreign banks which entered the country before August 2010 the choice to continue with their branch model.

"The framework provides the foreign bank with an opportunity to refresh their India market plans in terms of capital and management commitments to size the growth opportunities in form of both organic as well as inorganic options," Deloitte said.

It said going forward foreign banks who have significant India growth plans would need to develop unique competitive proposition and further the cause of financial inclusion by increasing penetration and coverage of banking services, specially in unbanked rural areas.

The report also emphasised that the transition from branch to wholly owned subsidiary should be seamless and less disruptive and less costly to be effective.