Mumbai: The Reserve Bank Friday came out with a discussion paper suggesting that foreign banks should be incentivised to operate in India as wholly-owned subsidiaries, as against the current system of having presence via branch network.
The discussion paper, on which RBI has invited comments from stakeholders by March 7, said "on balance, the subsidiary model has clear advantages over the branch model despite certain downside risks ...There may be a need to incentivize subsidiary form of presence of foreign banks".
Under the wholly-owned subsidiary (WOS) form, a foreign bank will have to operate as a locally incorporated legal entity and would be subject to the domestic laws like the Companies Act and the Banking Regulation Act.
At present, there are 34 foreign banks operating in India, with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 percent of the the total asset size.
With regard to repatriation of profits by foreign banks, it said the WOS be allowed to pay dividend to the parent bank, like the domestic banks.
Although the RBI had initiated two-phased banking reforms in March 2005, it had to abandon the second phase beginning 2009 in view of the global financial crisis.
The discussion paper further said that although the RBI permitted foreign banks to convert into WOS in 2005 itself, no banks opted the conversion.
In order to encourage existing foreign banks to convert into WOS, the discussion paper said the subsidiaries should be given preferential treatment for opening of branches as compared to those foreign banks which operate through branches.
"With a view to creating an environment for encouraging foreign banks to set up WOS, a less restrictive branch expansion policy, though not at par with domestic banks may be envisaged," the paper said.
The discussion paper also said although WOS cannot be treated at par with domestic banks, they may be allowed to raise rupee resources through non-equity capital instruments.
The paper pointed out that the Government has already clarified that a company with a foreign holding of over 50 percent is a foreign company.
"Therefore, WOSs of the foreign banks will be treated as foreign owned and controlled companies... This would be an additional reason because of which it would not be possible to provide full national treatment to WOSs of foreign banks in India," it said.
The discussion paper said that foreign banks seeking conversion into WOS be given 5 years time to comply with the priority sector lending norms.