Mumbai: Six years after laying down the road map for foreign banks in India, the country’s central bank is set to allow them a bigger role in the world’s second fastest growing major economy.

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The Reserve Bank of India (RBI) on Friday invited public comments on a discussion paper that suggested almost doubling the role of foreign banks in the Indian banking system, saying it will “incentivize" foreign players to operate through the wholly owned subsidiary route in the country. RBI has given until 7 March for comments.

All new overseas entrants in the Indian banking space will have to locally incorporate themselves, and existing players, particularly the systemically important ones, will be encouraged to go in for local incorporation and act as subsidiaries of foreign parents, RBI said. Mint had reported this on 5 October.

Systemically important banks are those whose assets become 0.25% of the total assets of all commercial banks as on 31 March, the central bank said.

Going by this definition, eight foreign banks, including Citibank NA, HSBC Holdings Plc and Standard Chartered Bank fall under this category.

As an incentive to set up wholly owned subsidiaries, RBI said it may allow them to raise rupee resources in the form of non-equity capital, adding that it will extend a “less restrictive branch expansion policy" to foreign players by allowing them to operate in semi-urban areas.

Noting that it may not be possible to mandate conversion of existing players into subsidiaries, RBI said “the regulatory expectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants...would opt for converting their branches into wholly owned subsidiaries".

On capital adequacy for new players, RBI said subsidiaries of foreign banks will be treated at par with new private sector banks and shall maintain a minimum capital adequacy of 10% of their risk-weighted assets.

Once the policy is in place, RBI said it will be more liberal in its branch licensing policy, but it is difficult to award “full national treatment" to foreign banks because this “could lead to unintended consequences for the banking sector".

They will then be treated virtually on par with their domestic peers in terms of branch expansion regarding which the banking regulator has all along been following a restrictive policy.

Deutsche Bank AG’s managing director and chief executive officer refused to comment on the paper because he had not read it. Spokespersons for Standard Chartered and HSBC said they will comment only after going through the RBI suggestions in totality. Citibank executives could not be reached, a spokesperson said.

Currently, there are 34 foreign banks in India and collectively they have at least 310 branches, 0.43% of the 71,998-strong branch network across the nation.

As of 31 March 2010, the share of foreign banks in total banking assets stood at 10.52%, out of which that of the top five was 7.12%, RBI said. Among these, Citibank has 1.6% of the total assets of the banking system, while that of HSBC is 1.52% and Standard Chartered Bank is 1.5%.

Under a 1997 World Trade Organization (WTO) agreement,total assets of foreign banks in India cannot exceed 15% of the total banking system. But RBI, in its discussion paper, has changed the limit in terms of capital and reserves of banks.

As per this, when the capital and reserves of foreign banks in India exceed 25% of capital of the banking system, the regulator will put restrictions on the further entry of new banks, branch expansion and will make it mandatory to get prior approval for capital infusion, RBI said.

Presently, the net worth of 21 foreign banks stands at 15% of the total banking system. Their market share in banking assets is 7.65% for the year ended 31 March 2010.

Under the WTO agreement, RBI needs to give 12 new branch licences to foreign banks every year, including those given to new entrants and existing players, but the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment, but not as many as the foreign banks want.