Global to Local: A perspective of foreign banks in India

By Dipasha Sharma
Foreign banks have made their presence in Indian banking system with their innovative financial products and customer oriented services. A foreign bank operates in India as branches of their parent bank and therefore has limited scale of operations and branches, but now the RBI wants to convert them locally incorporated as a wholly owned Indian subsidiary. This article brings forth the issues and concern of the foreign banks about their conversion of Global to Local in Indian market.

In Indian banking system foreign banks are

competitively tapping their feet and grabbing market share. With the reforms and new licensing norms for banking, Indian banking system is witnessing the encouraged professionalism and customer orientation. These changes in Indian banking system are driven by the increase participation of foreign and private banks. But still foreign banks prefer to operate in India as subsidiaries of their parents rather than local branches. According to the RBI discussion paper released on 21st January, RBI wants foreign banks in India to incorporate locally and that it will encourage large foreign banks like Citi bank, Standard Charted bank and HSBC to set up wholly owned Indian subsidiaries which would enable them to open more branches across the country.

Through this subsidiary model (local incorporation of foreign banks as wholly owned Indian subsidiary from branches of their parents) RBI is offering a less restrictive branch expansion policy to large foreign banks. Indian market has been highly profitable market for foreign banks in last financial year. Big players like Citi, HSBC and Standard Charted bank reported increase percentage in profit after tax. Therefore, this can be a good opportunity to foreign banks to expand their operations in India as they will be more liberal to open up new branches across the country. With this subsidiary model foreign banks can get following advantages and incentives as per the RBI discussion paper: Foreign banks converted into a wholly owned subsidiary from a branch would be allowed to acquire

existing banks, subject to holding a maximum of 74% equity post acquisition. Locally incorporated banks will be treated more liberally than foreign banks. Wholly owned Indian subsidiaries of foreign banks would be allowed to issue new financial products such as perpetual debt instruments, preference shares and freely open branches. This subsidiary model to foreign banks offered by RBI seems to be a lucrative opportunity, but on the flip side there are many issue regarding taxes and capital management in front of foreign banks. Following are the main issues concerning foreign banks about transformation of their corporate structure: Treatment of Taxes: Treatment of taxes is an important issue of concern as if a foreign bank incorporates locally, then positively it reduces the burden of taxes, but due to increase in number of branches the amount of capital gains tax in the transactional phase from a branch to parent will be high. Priority sector loan targets: If a foreign bank chooses to incorporate locally, then it has to meet the obligation of 40% lending to priority sector in India, i.e., agriculture, small and medium enterprise, exports and home loans up to 15 lakhs. Not only the priority sector lending, but the

opening of branches in rural areas cannot be so profitable deal for them. Borrowing limits and Capital Management: Borrowing limits and capital management can also be a big challenge for locally incorporated foreign banks as banks in India cannot lend more than 15% of their net worth to a single company and more than 40% to a corporate group. These regulations can create hurdle for their scale of operation. As far as this subsidiary model to foreign banks and its pros and cons are concerning, it is better to adopt it in case of being a big player in the Indian market. This transformation can be fruitful for the foreign banks in the long run only with the wide market coverage and distinguish themselves with innovative business practices and new financial products.