RBI keen to avoid an encore of ‘substantial withdrawal' of foreign banks from credit markets

The RBI would like ‘systemically important' foreign banks to consolidate their branches in India into ‘wholly-owned' subsidiaries, which would be easier to monitor and control.

Foreign bank branches would be considered to be systemically important once their assets (including off-balance sheet items) become 0.25 per cent of the total assets of all scheduled commercial banks in India.

The balance sheet assets of the 34 foreign banks operating in India through branches, dipped from 9.03 per cent of the total assets of scheduled commercial banks in March 2009 to 7.2 per cent in March 31, 2010 (10.52 per cent if off balance sheet assets are taken on board; seventy per cent of it accounted for by the top five banks).

‘substantial withdrawal'

This fall in market share was because of a ‘substantial withdrawal' of foreign banks from credit markets in India over 2009-10; so much so that y-o-y growth of credit was -7.1 per cent (as on July 3, 2009) and -15.9 per cent (as on October 9, 2009).

The RBI is aware that, “The insolvency of a parent or ring fencing of liquidity by the parent's home country regulator can have same effect on subsidiaries as on branches. Subsidiaries promoted by foreign banks, where they had large presence, have in some countries acquired a large share at the expense of domestic banks in the boom years and then, faced with troubles at home, substantially curtailed or withdrawn their operations in the host country.”

The RBI would, therefore, continue to ensure the domestic financial system does not come under the domination of foreign banks.

While deciding the approach towards conversion of existing foreign bank branches, India's commitments to WTO have to be kept in mind. In other words, since it is not possible to mandate conversion of existing branches into subsidiaries, it becomes necessary to ‘incentivise' this.

The main incentive the RBI has in mind is to liberally allow wholly-owned subsidiaries of foreign banks (WOS) to open branches in Tier 3 to 6 centres, while dealing with their applications for setting up branches in Tier 1 and Tier 2 centres ‘in a manner and on criteria' similar to those applied to domestic banks.

As a quid pro quo, priority sector targets for WOS would be upped from the 32 per cent stipulated for their branches, to the 40 per cent mandated for private and public banks; phased out over five years in 2 per cent increments.

As is presently the case, shortfalls would have to be made good by subventions to institutions such as Nabard. For agriculture WOS's would be required to reach only 10 per cent (as against 18 per cent for domestic banks), with the condition that indirect advances do not exceed one quarter of this amount.

The full text of the RBI's proposals is available on its Web site.

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