Many foreign banks remain unclear on how the wholly-owned subsidiary (WOS) route offered by the Reserve Bank of India to them will play out as priority sector lending as well as setting up and operating rural branches pose challenges, says a survey by PwC India.

According to the recently released WOS guidelines, foreign banks that choose to adopt the WOS model may enter into mergers and acquisitions with domestic private banks. However, this will be subject to regulatory approvals necessary for the transaction, as well as assessment of the foreign lender’s participation and success in the banking space.

Challenges for banks “Acquisition targets in India that are primarily promoter-driven and command high valuation, may also pose challenges for foreign banks. The lack of alignment of voting rights with shareholding was a concern expressed by many participants,” the survey of 32 foreign banks said.

Further, given the current voting rights cap of 10 per cent, immediate interest in inorganic growth (M&A) was not as high as expected.

The new guidelines also allow foreign banks to open new branches, scale up their business in India and list on exchanges, subject to the overall investment limit of 74 per cent. Further, the RBI has also mandated foreign banks with more than 20 branches to meet the 40 per cent priority sector norm, which is a challenge for them.

According to PWC, compliance with capital requirements would also pose problems for foreign banks.

Shinjini Kumar, Leader, Banking and Capital Markets, PwC India, said, “As foreign banks seek greater clarity on these options and amidst the re-balancing of capital, trade ties and political ties within Asia, there is a possibility of change in the landscape of foreign banks in India.”

Foreign banks account for less than 1 per cent (334 branches of 43 banks) of India’s total branch network, about 7 per cent of the total banking sector assets and a sizeable 11 per cent of profits. This data is as on March 2013.

Big foreign banks — Standard Chartered, Citibank, HSBC and Barclays — have India exposures of between 1 per cent and 5 per cent of their parent’s asset books and more than 20 branches in India. For the remaining foreign banks, their India exposure is below 1 per cent.

China over India The survey highlighted that majority of foreign banks prefer China to India as the most attractive destination. They cite India’s uncertain regulatory environment as a hindrance despite it being a large market for their banks.

“There was a sense of weariness about the tax regime. Refreshingly, most banks still seemed to have growth on their minds as their hiring preferences were in business lines and not in regulatory compliance, the trend across the developed markets,” Kumar said.

>beena.parmar@thehindu.co.in

comment COMMENT NOW