New norms for foreign banks point to more reforms: Fitch

Foreign banks with 20 or more branches anyway obliged to comply with broad and sub-targets under PSL, and have until FY18 to do so

Rating agency Fitch on Friday said the Reserve Bank of India’s new norms for foreign banks operating in India signalled a spate of reforms in the banking sector.

Though these guidelines were unlikely increase the banking sector’s competitive landscape, the central bank’s steps---nudging foreign banks to form subsidiaries---recognised the need for greater foreign participation in the growing Indian economy, Fitch said.

Wholly-owned subsidiaries of foreign banks will have considerable freedom to open branches, list on Indian exchanges and participate in domestic mergers and acquisitions.

Fitch said in theory, these changes were aimed at encouraging large foreign banks to widen their business profiles in India. However, it added the regulatory treatment, which was nearly equivalent to that for domestic banks, would also lead to challenges. Meeting priority sector lending norms (40 per cent of net bank credit) and ensuring at least 25 per cent of all new branches were opened in un-banked areas would be difficult for foreign banks.

Foreign banks with at least 20 branches are obliged to comply with the broad and sub-targets under priority sector lending norms, and have until FY18 to do so. However, their ability to achieve this remains largely untested; at times, even Indian banks find it difficult to meet these targets consistently.

Also, meeting priority sector lending guidelines might alter risk profiles and intensify competition in segments that weren’t traditionally growth-oriented for foreign entities such as agribusiness, for which a sub-limit of 18 per cent was applicable, Fitch said.

Though it isn’t obvious the recent framework would incentivise foreign banks to adopt the wholly-owned subsidiary model, in case these do, it is likely to be driven by strategic reasons, as commercial reasons appear less compelling.