 "RBI to nudge foreign banks for subsidiarisation post review of PSL norms")
The Reserve Bank of India (RBI) will nudge foreign banks in the country to opt for the subsidiarisation route after it reviews the priority sector lending (PSL) norms set for them.
“Foreign banks expressed to us some concerns on the kind of obligations they would have if they move into the wholly-owned subsidiary (WOS) structure... We are in the process, at the request of the ministry, of reviewing the priority sector norms. When that process is finished after consultation with the government, we will be able to communicate those norms. Once we do that, we can nudge the foreign banks to move into the wholly-owned structure,” RBI governor Raghuram Rajan said post the central bank’s board meeting in Kolkata on Thursday.
The central bank’s initial efforts to convince foreign lenders to create subsidiaries in India had failed.
Many of them believe that they do not have the required expertise and risk management framework to meet stiff PSL targets. RBI had said the PSL requirement for WOS of foreign banks will be 40 per cent, just like their Indian rivals. Out of this, 18 per cent of loans have to be offered to the farm sector.
While RBI has not made the WOS structure mandatory for existing foreign banks (which commenced banking business in India before August, 2010), it said foreign lenders that do not provide adequate disclosure in their home jurisdiction, have complex structures or are not widely held will have to set up subsidiaries in India. Also, foreign banks that entered India after August, 2010 will have to mandatorily convert their branches into WOS.
Rajan clarified new foreign banks that are entering India now will have to set up WOS. Also, RBI will continue to allow branch expansion of existing foreign banks.
“Ultimately, we are worried about systemic risks stemming from large foreign banks in India. Many of those have been in India for many years. We have to be explicit about the costs and benefits. Otherwise, it will be a retrospective regulation...If they apply (for branch licence), it goes through normal process. We have not stopped giving branch licences,” he said. Separately, the governor said while current account deficit has widened it still remains at a comfortable level.
“Current account deficit (at 2.1 per cent of gross domestic product) is still comfortable. The direction is something that we will be watching closely. There are risks to the current account. (But) at this point, while we are certainly vigilant, but I won't say we are apprehensive,” Rajan said.
He added that the fall in global oil prices has provided a cushion to the current account and persuaded RBI to experiment with liberalising restrictions on gold imports.
"It will be hard to maintain the kind of restrictions that we had for a long period. At some point we have to start taking off some of the restrictions. The oil prices are falling. It gives us some cushion on the current account. It is a good time to see what happens if we take off the restrictions (on gold imports)," Rajan said.
“Foreign banks expressed to us some concerns on the kind of obligations they would have if they move into the wholly-owned subsidiary (WOS) structure... We are in the process, at the request of the ministry, of reviewing the priority sector norms. When that process is finished after consultation with the government, we will be able to communicate those norms. Once we do that, we can nudge the foreign banks to move into the wholly-owned structure,” RBI governor Raghuram Rajan said post the central bank’s board meeting in Kolkata on Thursday.
The central bank’s initial efforts to convince foreign lenders to create subsidiaries in India had failed.
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After taking feedback from bankers, RBI in November last year released a new framework for setting up WOS by foreign banks in India. It promised foreign lenders “near-national” treatment in branch expansion and permission to acquire local private banks if they choose to create subsidiaries here. Capital gains tax and tax duty have also been waived for conversion of foreign banks’ India branches into WOS.
Many of them believe that they do not have the required expertise and risk management framework to meet stiff PSL targets. RBI had said the PSL requirement for WOS of foreign banks will be 40 per cent, just like their Indian rivals. Out of this, 18 per cent of loans have to be offered to the farm sector.
While RBI has not made the WOS structure mandatory for existing foreign banks (which commenced banking business in India before August, 2010), it said foreign lenders that do not provide adequate disclosure in their home jurisdiction, have complex structures or are not widely held will have to set up subsidiaries in India. Also, foreign banks that entered India after August, 2010 will have to mandatorily convert their branches into WOS.
Rajan clarified new foreign banks that are entering India now will have to set up WOS. Also, RBI will continue to allow branch expansion of existing foreign banks.
“Ultimately, we are worried about systemic risks stemming from large foreign banks in India. Many of those have been in India for many years. We have to be explicit about the costs and benefits. Otherwise, it will be a retrospective regulation...If they apply (for branch licence), it goes through normal process. We have not stopped giving branch licences,” he said. Separately, the governor said while current account deficit has widened it still remains at a comfortable level.
“Current account deficit (at 2.1 per cent of gross domestic product) is still comfortable. The direction is something that we will be watching closely. There are risks to the current account. (But) at this point, while we are certainly vigilant, but I won't say we are apprehensive,” Rajan said.
He added that the fall in global oil prices has provided a cushion to the current account and persuaded RBI to experiment with liberalising restrictions on gold imports.
"It will be hard to maintain the kind of restrictions that we had for a long period. At some point we have to start taking off some of the restrictions. The oil prices are falling. It gives us some cushion on the current account. It is a good time to see what happens if we take off the restrictions (on gold imports)," Rajan said.