Large foreign banks need to be responsive to local norms: RBI

Foreign banks will have to operate as wholly-owned units for better regulatory control, says Raghuram Rajan

Sending a strong signal that large foreign banks will have to operate as wholly-owned units for better regulatory control, Governor Raghuram Rajan today asked them to be responsive to local regulations and warned that if "carrot does not work," it will have to wield the stick.

"At some time this (wholly-owned subsidiary route) will have to become a regulatory issue and to ensure the banking sector stability, we need our large foreign entities to be responsive to the regulations here," Rajan told reporters at the customary post-policy meeting here.

"And, therefore at some point in time if the carrot does not work, we may need to push a little harder, as some of the jurisdictions across the world have done," he said.

Last November, the RBI had released a framework for large foreign banks with over 20 branches to convert into wholly- owned subsidiaries and had set a cut off period of August 2010 under which those banks entering the country after this date would have to become subsidiaries and not branches.

The framework said all foreign banks which move to a wholly-owned subsidiary route will be treated nearly on par with nationalised banks apart from capital gains tax and stamp duty benefits.

"But unlike some of our commentators who feel that we were giving away the house by allowing this, the foreign banks don't see it as appetising," Rajan said.

The framework had set the priority sector lending norms for such branches at 40% like domestic scheduled commercial banks.

"Some of them are worried about the greater priority sector obligations. Going forward we will have to take a view at some time," the RBI governor said.

Rajan said before making it mandatory for foreign banks to convert into wholly-owned subsidiary, there are some issues which need to be resolved.

"But before that let us first address some of the concerns that people have, not just the foreign banks, but the people elsewhere and see if this becomes a more attractive monetary move," Rajan said.

He said some foreign banks have informed the RBI that they are some distance along the way in making up their mind on conversion to wholly-owned subsidiary.

He also said there is no deadline being set so far for foreign banks to meet the wholly-owned subsidiary norms.

As per the new criteria, only Standard Chartered, HSBC and Citi Bank out of the over 45 foreign banks have to mandatorily become subsidiaries. The troubled British lender RBS also had to follow but it has decided to exit from retail banking in India.