New foreign banks may be asked to form arms

Final norms on subsidiary route after resolving legal issues

The Reserve Bank of India (RBI) is likely to ask new foreign banks entering the country to form subsidiaries here. It will also nudge the existing foreign players to migrate to the subsidiary model from the branch route that they currently follow.

Addressing a banking summit organised by the Indian Merchants Chamber (IMC) here, RBI governor D Subbarao said the central bank has worked with the government to resolve major taxation issues such as exception from stamp duty and capital gains tax on conversion from a branch to a subsidiary.

However, a few legal issues are yet to be resolved, which would be done in the next few months. Thereafter, RBI would issue final guidelines, Subbarao said. Following the global financial crisis in 2008, RBI had deliberated on whether India should prescribe mandatory incorporation of subsidiary foreign banks.

Later, in 2011, it came out with a discussion paper on the merits and demerits of this initiative.

The proposed framework leans towards the subsidiary model for fresh entrants while nudging existing foreign banks above certain balance sheet size to move from a branch model to a subsidiary model.

This will level the playing field for foreign banks and make the Indian banking system more competitive and inclusive.

The road map for the presence of foreign banks in India put out in 2005 allows foreign banks a choice - of coming in either as a branch or as a subsidiary - but not in both modes at the same time.

Even so, all foreign banks operating in India, currently 43 in number, have chosen to come in only in the branch mode.