Subsidiary route likely to be optional for foreign banks

Reserve Bank of India to issue guidelines by end-September, in discussion with government on tax implications of the alternatives

In a major relief to foreign banks operating in India, the Reserve Bank of India (RBI) might not make it mandatory for those entities to convert into subsidiary companies.

The banking regulator is finalising the norms on subsidiarisation of foreign banks. It appears likely to make the subsidiary route optional for the foreign lenders.

However, depending on the subsidiarisation model’s success, RBI could ask all foreign banks to adopt this structure at a later stage.

“In our discussions with RBI, we were given the impression that subsidiarisation will not be made mandatory. The guidelines are expected in the next 90 days,” a senior executive of a large foreign bank in the country told Business Standard, requesting anonymity. The central bank is in discussion with the government on tax-related issues, seen as a major hurdle for setting up as a subsidiary.

Foreign banks can choose to operate either through branches or set up subsidiaries. At present, all 43 foreign lenders operate via the branch route, without establishing local subsidiaries.

RBI had released a discussion paper on the presence of foreign banks in India in January 2011.

Bankers feel foreign banks that have large presence in India and are considered “systemically important” will probably set up subsidiaries to expand their branch network. It is generally believed that foreign banks opting for subsidiarisation will be treated at par with Indian banks in terms of branch licensing.

RBI is required to permit opening of at least 12 foreign bank branches every year.

In the past, the central bank had allowed foreign lenders to open up to 17-18 branches in a year. These banks have often complained that the restrictive branch licensing policy has prevented them from expanding their businesses significantly in India.

“The idea (of subsidiarisation) is to have better control. The foreign banks that are systemically important may not have the option to continue operations through branches. But not all foreign banks will be asked to set up subsidiaries,” said another banker in charge of the consumer banking business of a foreign bank in India.

Sector analysts feel the central bank might have decided to keep subsidiarisation optional after getting feedback from foreign banks that have only one or two branches in the country and have no immediate plans to start a retail banking business.

Foreign banks had earlier resisted the proposal of subsidiarisation due to issues pertaining to taxation and stamp duty.

Some banks were also not comfortable with the proposal to list the subsidiaries in local exchanges, following the completion of a minimum prescribed period of operation.