Citibank, StanChart, HSBC may become wholly owned subsidiaries in India
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Mumbai: Citibank NA, Hong Kong and Shanghai Banking Corp. Ltd (HSBC), Standard Chartered Bank and a few other foreign lenders may set up wholly owned subsidiaries (WOS) in India, as they will be treated like “near national” banks by the Reserve Bank of India (RBI) when it comes to opening branches in Asia’s third largest economy if they do so.
RBI released the new norms for foreign banks on Wednesday, nearly three years after the first discussion paper on the subject was made public.
Foreign banks with “complex structures” and banks that do not provide “adequate disclosure” in their home jurisdiction will have to compulsorily convert themselves into wholly owned subsidiaries of their parents in India.
A late evening RBI release also said foreign banks that become “systemically important” on account of their balance sheet size in India have to convert themselves into wholly owned subsidiaries. Systemically important banks are those whose assets account for at least 0.25% of the total assets of all commercial banks. Going by this definition, 12 foreign banks, including Bank of America Corp., Barclays Plc, Citibank, Deutsche Bank AG, HSBC, DBS Bank Ltd and Standard Chartered Plc fall into the category.
However, the big three along with other foreign banks that started operations in India before August 2010 have the option to continue their business through the branch mode, but they will be “incentivized” to follow the WOS route, RBI said.
Whether such foreign bank subsidiaries can buy private sector banks in India will be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, the RBI release said.
Under a World Trade Organization (WTO) agreement, RBI is required to give foreign banks 12 new permits to open branches every year, including those given to new entrants and existing lenders, but the Indian regulator has been liberal in its policy. Those foreign banks who decide to opt for the WOS structure will be able to expand their branch network like a local bank without seeking prior RBI approval “except in certain locations that are sensitive from the perspective of national security”.
Some 43 foreign banks now have 334 branches, mostly in cities, less than half a percentage point of the banking system’s total branch network.
Citibank, which has the biggest asset base among all foreign banks in India, is 110 years old in India. It has 43 branches across 29 centres. With around Rs.93,000 crore of assets, Standard Chartered has 100 branches. With close to Rs.81,100 crore in assets, HSBC currently has 50 branches in India. Among other foreign banks, Deutsche Bank has 17 branches and DBS runs 12.
Spokespersons for Citibank and HSBC, and DBS India general manager and chief executive Sanjiv Bhasin declined to comment as they were yet to go through the RBI circular.
A Standard Chartered spokesman said the bank welcomed the new guidelines, but added that “...it is too early to comment in detail without reviewing the guidelines and its implications”.
“Complex structure” typically refers to the opaqueness of shareholding of a bank. For example, many European banks, especially in the wealth management business, are owned by companies and individuals with a complex chain of holding company and cross holdings. In many cases, the owners of the banks are hidden under several layers.
In India, financial institutions are regulated by distinct authorities—RBI in the case of banks. However, in many European countries, banks can work under that country’s company laws, which is not acceptable in India.
There is no deadline set for banks to take call on whether to incorporate themselves locally. This means some banks could take their “own time” to become a WOS, said Robin Roy, associate director, financial services at consulting firm PricewaterhouseCoopers.
“But they will eventually want to do that because that gives them a level playing field. Now their grouse of not being able to open branches has been addressed. It is good for foreign banks in India; at the same time, it is good for Indian banks as well because of the reciprocity clause,” Roy said.
RBI said its new policy will be guided by the two cardinal principles of reciprocity and single mode of presence.
“The policy incentivizes the existing foreign bank branches which operate within the framework of India’s commitment to WTO to convert into WOS due to the attractiveness of near-national treatment. Such conversion is also desirable from the financial stability perspective,” RBI said.
Like local banks, foreign banks will have to lend 40% of their funds to the so-called priority sector that includes loans to farmers, small enterprises, homes loans below a certain threshold, and minorities.
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However, foreign banks that want to convert into WOS will be given “adequate transition period” to achieve their priority sector targets, the central bank said without giving a time frame for the same.
Foreign banks’ subsidiaries in India will need to have a minimum paid-up equity capital of Rs.500 crore, while existing branches of foreign banks will have to have a minimum net worth of a similar amount if they want to convert into a WOS.
The parent of the WOS would be required to issue a letter of comfort to RBI for meeting the liabilities of the WOS.
“Banks that are here for a long time and plan to come here to be invested for a long time will want to become WOS because after a limit, RBI may restrict foreign banks’ activities as indicated in the guidelines,” PWC’s Roy said.
“To prevent domination by foreign banks, restrictions would be placed on further entry of new WOSs of foreign banks or capital infusion, when the capital and reserves of the WOSs and foreign bank branches in India exceed 20% of the capital and reserves of the banking system,” RBI said.
As on 31 March, foreign banks accounted for about 15.15% of the Rs.7.09 trillion capital, reserves and surplus of all scheduled commercial banks, according to RBI data.
WOSes of foreign banks have also been given the option to dilute their equity stake to 74% or less, but in the event of such a dilution, these banks will have to list in the local stock market.
RBI also spelt out the composition of the boards of foreign banks who opt for the WOS route. The Indian central bank expects at least 50% of the directors on board the WOS to be Indian nationals, including non-residents or people of Indian origin on the condition that not less than one-third of the directors reside in India.
Not less than two-third of the directors should be non-executive directors, while a minimum of one-third of the directors should be independent of the management of the subsidiary in India, its parent or associates, RBI said.