Subsidiaries may not guarantee near-national treatment for foreign banks

Reciprocity clause likely to prevent liberal branch expansion

Creating subsidiaries in India may not necessarily ensure near-national treatment in branch expansion for all foreign banks.

The reciprocity clause in the Reserve Bank of India's (RBI) guidelines on subsidiarisation of foreign banks in the country means overseas lenders will be granted near-national treatment here only if their home countries allow Indian lenders to open branches without much restriction, people familiar with the development said.

According to sources, banks from US and some of the European nations will find it difficult to expand their branches in India as a result of this.

"Most countries around the globe are protective about their banking system and do not easily allow foreign players to expand their presence rapidly," a senior banker with a mid-sized European bank in India said requesting anonymity.

It will be more difficult for those foreign banks (from countries that do not have reciprocity arrangements with India) that started operations here after August, 2010 or are planning to enter the country now. These lenders will have to create wholly-owned subsidiaries to conduct banking business in India even though they may not be granted near-national treatment in branch expansion. It may prompt a few lenders to exit India, bankers said.

RBI has not made subsidiarisation mandatory for foreign banks that started business in India before August, 2010. But as per the new norms, lenders commencing banking business in India after this date will now have to convert their branches into subsidiaries.

"I don't think many foreign banks will be keen to set up a subsidiary here unless they are allowed to open branches freely. If because of the reciprocity clause branch expansion gets restricted then there is no point of creating a subsidiary. We will wait for more clarity from the Reserve Bank on this issue before taking a decision," said a senior executive of another foreign bank in India.

Bankers feel that trade treaties between India and other countries may offer a solution to this issue. For instance, India and Singapore signed a comprehensive economic co-operation agreement in August, 2005. Following this RBI and the Monetary Authority of Singapore opened up the financial sector of their respective countries.

The Indian banking regulator allowed Singapore's largest lender DBS Bank to open more branches here. DBS Bank's branch count in India has increased to 12 from two in the last five years. RBI also allowed Singapore's United Overseas Bank to commence banking business in India.

The Monetary Authority of Singapore, on the other hand, offered qualifying full bank (QFB) status to State Bank of India (SBI), which permitted the state-run lender to mobilise retail deposits and open up to 25 centres in Singapore.