Mumbai: The Reserve Bank on Tuesday ruled out offering any regulatory arbitrage to foreign banks which are ready to get locally incorporated.
"The full intent of our proposal is that the foreign bank should have both the privileges and responsibilities of domestic banks when they become wholly-owned subsidiaries... this is not meant to be giving them any regulatory arbitrage," RBI Governor Raghuram Rajan told reporters at the customary post-policy press conference here.
The objective is to have some safeguards to make sure the domestic banking system doesn't turn out to be, beyond a certain point, foreign owned, he said.
In the busy season credit policy unveiled today, Rajan said: "While it will not be mandatory for existing foreign banks (i.e., banks set up before August 2010) to convert into wholly-owned subsidiaries (WOSs), they will be incentivised to convert into WOSs by the attractiveness of the near-national treatment afforded to WOSs."
Speaking about benefits of local incorporation, Rajan said: "The WOS route will give them enough incentives to operate and expand. The full intent is that they should also have the responsibility which means priority sector and other responsibilities that we ask other domestic banks to take up."
RBI said the final guidelines on MNC banks will be issued by the middle of next month. The Central bank said WOSs of foreign players would be treated at par with domestic banks, including in the matter of opening branches.
The RBI is pushing large foreign banks with 30 or more branches in India to get incorporated locally. These banks are open to this idea provided they get a level playing field with local banks and a waiver on stamp duty.
The RBI released a discussion paper on the presence of foreign banks on January 21, 2011, factoring in lessons from the 2008 global meltdown, which favoured a subsidiary mode of presence from a financial stability perspective.
Taking into account feedback from stakeholders, it said a scheme of subsidiarisation of foreign banks, guided by the two cardinal principles of reciprocity and single mode of presence, is being finalised.
The foreign lenders then asked for waiver of stamp duty and some tax incentives, which the RBI and government agreed after relevant amendments to the respective laws.
According to its commitments to the World Trade Organisation (WTO), India allows 12 new foreign bank branches in a year.
There are 45 foreign banks operating through a network of 335 branches as of now apart from 47 such lenders with representative offices in the country.
Standard Chartered, the largest foreign bank by branch presence, has its depository shares trading on the domestic bourses, although it hasn't adopted a subsidiary route here.
Only three multinational banks - StanChart, HSBC and Citi - have more than 30 branches. Although the Royal Bank of Scotland has 31 branches, it is winding down local retail operations. While StanChart leads the pack with 99 branches, HSBC has around 50 and Citi about 40 branches.
Rajan, speaking at the annual World Bank-IMF meeting in Washington early this month, had said he would allow foreign banks to take over local banks apart from giving them a free hand in opening branches in the country.
The RBI favours the WOS model instead of the present branch model for foreign lenders, saying the former will help the central bank to have better control on them, especially in case there a run on the parent back home.
