Foreign banks' arms must meet 40% priority sector lending target: RBI

Foreign banks set up as wholly-owned subsidiaries will be required to meet the priority sector lending target of 40 per cent of adjusted net bank credit, which is the same for domestic commercial banks, said the Reserve Bank of India, in its discussion paper released today.

The central bank has, however, proposed to prescribe a lower sub-target of 10 per cent for lending to agriculture sector by the wholly-owned subsidiaries, since the branch spread of these banks will be limited.

The agri lending target for domestic commercial banks is 18 per cent.

The RBI also suggests that not more than 2.5 per cent of the sub-target should relate to indirect agriculture finance, similar to domestic commercial banks.

At present there is no target or sub-target for agri lending for branches of foreign banks. And the priority sector target is 32 per cent.

Similarly, the RBI also proposes that wholly-owned subsidiaries set up by conversion of existing branches may be allowed a transition period of five years from the year in which they incorporate in India for meeting priority sector lending norms.

With regard to wholly-owned subsidiaries setting up subsidiaries or making a significant investment in associates, the RBI will consider if there are NBFCs set up by the parent banking group under FDI rules for undertaking same or similar activity.

With regard to the dilution or listing of wholly-owned subsidiaries of foreign banks in India and allowing mergers and acquisitions of Indian private sector banks by foreign banks or their wholly-owned subsidiaries, the RBI said it may be considered after a review is made of the experience gained on the functioning of wholly-owned subsidiaries of foreign banks in India.

Currently, branches of foreign banks do not have access to the domestic rupee resources to augment their non-equity capital in India. They are permitted to raise funds from their head office for augmenting Tier I and Tier II capital through Innovative Perpetual Debt Instruments (IPDIs) and debt capital instruments subject to terms and conditions prescribed for Indian banks and additional terms and conditions specifically applicable to foreign banks.

As an incentive to foreign banks to set up wholly-owned subsidiaries or convert their branches into wholly-owned subsidiaries, they may be allowed to raise rupee resources through issue of non-equity capital instruments in the form of IPDI, Tier I and Tier II preference shares and subordinate debt as allowed to domestic private sector banks, the RBI said.