Money & Banking

Subsidiary route for foreign banks will provide level playing field, say analysts

Satyanarayan Iyer Beena Parmar Mumbai | Updated on March 12, 2018

The new RBI guidelines that allow foreign banks to set up operations in India in the form of independent subsidiaries will lead to level playing field and could alter the banking landscape in the country, say analysts.

They expect the setting up new foreign banks, which will happen over the next three-five years, to lead to more competition among banks. “With this framework in place, there is now much greater likelihood of foreign banks looking to seriously expand their operations in India,” said Vaibhav Agarwal, VP-Research, Angel Broking. “In the next three-five years, the entire banking landscape in India is likely to change. India is a very attractive growing market.”

According to Monish Shah, Senior Director, Deloitte, “Banking right now is capital-starved, therefore anything that can help build scale and capital should be good for the industry.”

A bank opting to embrace the subsidiary model for operations will be given “near national” treatment in terms of opening more branches, if a similar treatment is meted out to Indian banks in the foreign bank’s home country.

Regional foreign banks

While foreign banks will take time to evaluate the guidelines, Shah felt the new norms will be of immediate benefit to regional foreign banks.

“The regional banks (like those in the Middle East or Africa) can evaluate and scale up their business here through the wholly-owned subsidiary route,” Shah said.

Citibank and HSBC declined to comment. Standard Chartered said that it is “too early” to comment in detail. Sanjiv Bhasin, General Manager and CEO, DBS Bank, said that the bank will continue to evaluate the guideline and it will take two-three months to come out with a definitive roadmap for the subsidiary model. DBS Bank is the only foreign bank which has said it is “keen” on the subsidiary route in India. When asked if it will acquire stakes in domestic private sector banks, Bhasin said, “Complete details on the merger and acquisition option is still awaited.”

The RBI said that wholly-owned subsidiaries may be permitted to enter into merger and acquisition transactions with any private sector bank in India, subject to the overall foreign investment limit of 74 per cent.

While most foreign banks feel that the mandatory lending of 40 per cent to priority sector will be “challenging,” they will have to meet these targets to get treated on a par with domestic banks.

Vaibhav Agarwal said priority sector targets will not pose a major challenge for foreign banks. “Even private sector banks that do not meet their priority sector targets have managed compliance by utilising various modes, such as securitisation and rural infrastructure development fund investments.”

Published on November 07, 2013

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