By promising a more liberal policy for opening branches in return for converting themselves into companies registered in India, the RBI has given foreign banks a chance to expand their presence in the country even while subjecting them to greater regulatory oversight. Currently, foreign banks operate in India solely through branches of their parents incorporated in jurisdictions where Indian regulations have limited applicability. While that has given these banks greater leeway in terms of disclosure requirements or usage of funds — even to the extent of privileging home country depositors in any settlement claims — it has severely constricted their growth opportunities in India. The 334 branches of 43 international banks now account for just 3.9 per cent of the total deposits and 5.8 of outstanding advances and investments of all scheduled commercial banks in India. This has partly to do with the restrictions on branch expansion; the World Trade Organisation (WTO) rules oblige India to grant permits for only 12 new offices for foreign banks every year.

The RBI’s new scheme for setting up wholly-owned subsidiaries (WOS) by foreign banks in India dangles a carrot by way of extending them “near national treatment” in opening new branches. As locally incorporated banks, the WOS will be allowed to establish offices anywhere in the country — barring certain “sensitive locations” — without having to seek the RBI’s prior approval. While they would have to follow rules such as ensuring that at least a quarter of their new branches are in unbanked rural centres or meeting prescribed priority sector lending targets, these aren’t very different from those imposed on other Indian banks. The stick is that the liberal branch licensing norms are conditional upon the banks bringing their entire operations in India under separate locally-incorporated WOS. If the banks choose to carry on business through the branch mode, their branch expansion would continue to be governed by India’s commitments under the WTO framework.

The above carrot-and-stick approach policy makes sense, when major foreign banks are themselves keen on grabbing a bigger slice of the market for financial products in a $2 trillion (and growing) economy. Indian consumers stand to gain from their expanded operations and greater competition. But consumer interest will also be served by ring-fencing or making a clear delineation of their assets and liabilities from those of the foreign parents; especially important in the aftermath of the 2008 global financial crisis. Domestic incorporation of foreign banks can help contain the contagion effects from crises that originate elsewhere, for which the depositors here aren’t responsible.

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