RBI sets the ball rolling on new branch licences

The Reserve Bank of India (RBI) today set in motion the process of allotting bank licences to private sector players and non-banking finance companies (NBFCs).

It will come up with a discussion paper by July this year. This will be followed by discussions with stakeholders before the guidelines are issued. In addition, RBI said, applications for new bank licences would be referred to an external expert group.

Till October last year, RBI was against issuing new bank licences, particularly to large corporate houses. However, the finance minister, in his Budget speech, said RBI was considering giving additional bank licenses to private sector players. NBFCs could also be considered if they met RBI’s eligibility criteria, he said.

After the Budget speech, a host of NBFCs, such as IDFC, Aditya Birla Financial Services, Reliance Capital, Religare Enterprises and Indiabulls, announced plans to apply for bank licences. Smaller finance companies such as Srei and Shriram Transport also expressed their intent to approach the regulator.

Diversified shareholding will be an important criterion while considering applications for new bank licences, according to RBI Deputy Governor Usha Thorat.

Through its Monetary Policy Review for 2009-10, RBI said it was keen that foreign banks operating in the country move to a subsidiary structure and that it would prepare a discussion paper on the mode of presence of foreign banks by the end of September.

All foreign banks in the country operate as branches of their overseas parent banks, although the Roadmap for Presence of Foreign Banks in India, released in February 2005, allows them to convert to wholly-owned subsidiaries and be incorporated in India.

RBI wants foreign banks to operate as wholly-owned subsidiaries of their parents to make cross-border resolution easier. “Apart from easing the resolution process, this will provide greater regulatory control and comfort to host jurisdictions,” RBI said in its monetary policy review.

“There is a debate on performance of foreign banks. Our experience with foreign banks has not been as bitter as many other countries. For cross-border assessment, we have taken this step,” RBI Governor D Subbarao said at a press conference in Mumbai today. Foreign banks have so far not shown much interest in the model because they see few tangible benefits.

“Foreign banks as an industry didn’t go because there was no defined benefit linked to becoming a WoS in the 2005 roadmap. There was no differential benefit between a foreign bank operating as a branch in the country versus a WoS,” Standard Chartered Bank Regional Chief Executive Neeraj Swaroop told Business Standard in an earlier interview.

Stanchart will be the first overseas company to list in India when it issues Indian Depository Receipts later this year.

The head of another foreign bank said there were significant costs around stamp duties in a WoS model.

Foreign bankers said they would show more interest in converting to subsidiaries if it brought tangible benefits such as easier branch licensing norms.

Branch licensing for foreign banks is strictly regulated by RBI and foreign banks, as a category, do not receive more than 18 branch licences in any given year. World Trade Organization commitments require India to issue at least 12 branch licences to foreign banks every year.