Mumbai: Reserve Bank of India governor D Subbarao on Friday made a strong case for subsidiary model for foreign banks to operate in the country as compared with the branch model, saying this is essential in view of increasing ‘interconnectedness’ of banks worldwide.
Foreign banks which operate through subsidiaries incorporated locally will have more accutability to the local market in the event of ‘stress’ across global market that may affect their parent institutions, Subbarao said speaking at Bancon, 2010 organised by Indian Banks Association.
Noting that foreign banks have acquired business ‘rigorously’ in many emerging markets during boom times and retrenching them during the downturns, Subbarao said the subsidiary model provides several comforts to the regulator.
“First, managerial decisions in subsidiaries are mainly driven by local economic conditions; second, there is a clear delineation of the capital of the domestic bank from its parent bank which protects the interests of domestic depositors,” Subbarao said.
Also, the presence of independent directors on the boards of subsidiaries of foreign lenders provide sufficient “separation between the bank and its owners to ensure that the board does not have unfettered ability to lean in favour of the owners and against the interest of domestic depositors, especially in times of stress,” Subbarao said.
In 2005, the RBI had allowed foreign banks to operate in the country either as a branch or subsidiary but not both at the same time. “Even so, all foreign banks have so far opted to come in only in the branch mode,” Subbarao said.
The apex bank will come with a discussion paper on the issue shortly, he said.
India has currently 34 foreign banks operating in India with a total of 315 branches and they account for about 7.2% of the total assets of scheduled commercial banks.