RBI may ease capital norms for foreign banks

The Reserve Bank of India (RBI) has started a comprehensive review of the operational guidelines applicable to foreign banks in India.

Sources clarified that the process is not similar to a review of the road map for expansion of foreign banks, which primarily deals with norms on ownership issues and acquisition by foreign banks in the country.

“The review of the ownership and foreign banks’ acquisition of Indian banks would require the Parliamentary approval and thus needs to be dealt with when the deadline of April 2009 approaches,” said a source.

The current review by the central bank relates to the capital requirement of foreign banks with the objective of providing them some reprieve, especially for smaller foreign banks that are operating in India.

To start with, RBI may take into account the overall capital of the parent foreign banks for measuring the capital adequacy, prudential norms and exposure to various sectors. At present, the capital base of the foreign banks’ local subsidiary is taken into consideration, which poses various problems for the expansion of foreign banks.

Sources added that while foreign banks have been seeking a relaxation in this regard for quite some time, the time is now ripe in the wake of the global liquidity crunch. The relaxation will be a great relief, especially for smaller foreign banks, which are either new entrants to India or have downsized their operations elsewhere to have a better focus on the Indian market. Sources, however, said it was not clear whether the relaxation would be across the board or on a case-to-case basis, depending on the type of the Indian operations.

In earlier representations to RBI, foreign banks had debated that their parent banks’ capital should be used because, in case of any eventualities, RBI promptly approaches the parent banks or the respective countries’ regulators for redressal.

Secondly, the central bank may also relax the norm on the stakeholding of parent holding companies of foreign banks in their Indian non-banking subsidiaries, sources said.

Currently, foreign banks can operate in India either through the branch presence or by setting up a 100 per cent, wholly-owned subsidiary.

For the existing banks, RBI usually gives branch licences much higher than the WTO commitments. However, it has been urging other host countries, like the United Kingdom and the United States, to reciprocate in a similar way for assisting the expansion of Indian banks in their countries.