The Reserve Bank of India (RBI) said it will treat foreign banks operating in the country on nearly equal terms with local lenders if they move to a wholly owned subsidiary structure, as it seeks to bolster its regulatory powers in the wake of the global financial crisis.
The rules issued by the RBI late on Wednesday were generally in line with expectations and could expand opportunities for international banks in the country, since they would have greater freedom to open branches and would be able to participate more fully in the development of the Indian financial sector.
However they could also face a greater regulatory burden.
Currently foreign banks in India with substantial networks - a category including Citigroup, HSBC, and Standard Chartered - operate as branches, not subsidiaries, a distinction which crucially affects their regulatory framework.
Foreign-owned banks operating as subsidiaries would be required to earmark 40 per cent of their lending to the "priority sector," which includes underserved parts of the economy and agriculture, the same obligation as for domestic banks and in line with a rule being phased in for existing foreign banks with 20 or more branches.
However, foreign banks would only be allowed to buy a local private-sector lender after a review of the overall extent of foreign bank penetration.
To prevent foreign domination of the banking sector, the central bank also said it would place restrictions on the further entry of new wholly owned subsidiaries of foreign banks if and when the assets of institutions owned abroad exceed 20 per cent of the country's total.
India's banking system is dominated by state banks, which accounted for more than two-thirds of the sector's assets at the end of March 2012, the latest RBI data showed. Foreign banks accounted for 4.3 per cent of deposits as of March 2012.
The RBI said foreign banks wanting to enter the country but having what it regards as over-complex structures, a lack of adequate disclosure or lacked a broad enough spread of shareholders would be allowed entry only as wholly owned subsidiaries.
Foreign banks operating in India before August 2010 have the option of continuing as branches. "However, they will be incentivised to convert into WOS (wholly owned subsidiaries) because of the attractiveness of the near-national treatment afforded to WOS," the RBI said in a statement.
"We welcome the new guidelines from the regulator. However it is too early to comment in detail without reviewing the guidelines and its implications," a Standard Chartered spokesman said.
A Citi spokesman in India could not be immediately reached for comment, while HSBC declined comment.
Smaller banks gain on foreign takeover hopes
Small to mid-sized private banks rally on hopes they could become acquisition targets for foreign banks. The RBI on Tuesday said it will treat foreign banks operating in the country on nearly equal terms with local lenders should they move to a wholly owned subsidiary structure.
Foreign banks would only be allowed to buy a local private-sector lender after a review of the overall extent of foreign bank penetration, the central bank said in the release.
Lakshmi Vilas Bank gains 6.3 per cent, Development Credit Bank rises 4.8 per cent, Karnataka Bank is up 6.2 per cent, Dhanlaxmi Bank is 3.9 per cent higher while City Union Bank gains 2.5 per cent.
However, large private banks edge down on profit-taking after a recent rally.
ICICI Bank is down 0.7 per cent, HDFC Bank falls 0.5 per cent.
The Sensex is trading up 0.2 per cent after a flat start. Traders expect the index to continue seeing some consolidation in the near-term.
