Why is the Reserve Bank of India insisting that foreign banks operating in India must function not as branches, but as units of a subsidiary registered in India?

Ratnakar Pandey, Allahabad

The RBI perhaps has taken a cue from its insurance counterpart, the IRDA which right from the inception has been steadfast in its belief that foreign insurance companies can operate in India only through their subsidiary companies in India. The reasons are not far to seek. A branch does not lend itself to control as much as an Indian subsidiary. The branch manager is not one of the directors who can be held accountable. In case of subsidiaries its directors can be directly held accountable should something were to go wrong. Moreover, a subsidiary has to prepare and submit accounts of its Indian operations whereas branches at best submit individual balance sheets. What the RBI proposes to do is what it should have done long ago. A possible downside of this move could be a foreign bank would draw a Chinese wall between its Indian and global operations so as to wash its hands off huge liabilities whereas a branch can always dip into the reserves of the global balance sheet.

Accounting for NPAs

Why are banks allowed to set off their bad debts against their income ?

Manju Taneja, New Delhi

This was the norm earlier which was latched onto with alacrity by adverse publicity-shy banksAny disclosure of bad debts would have an adverse impact on a bank's credibility with its customers and hence this leeway. But regulators and accounting standard setters realised the futility of this protection in the current milieu of transparency and maximum disclosures. State Bank of India's profits took a hit thanks to its provisioning going back to the past and it has made no bones about it. Banks cannot be allowed to opaque on bad debts given the fact that apart from the depositors, many have another important constituency to address - shareholders.

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(This article was published on June 12, 2011)
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