ABN Amro may be first to opt for subsidiary route

ABN Amro Bank is likely to be the first foreign bank to opt for the subsidiary route. "Our application is already pending with the Reserve Bank of India," said Romesh Sobti, executive vice-president and country representative, ABN Amro Bank N.V. (India).

If the tax advantage is sufficient enough to differentiate the subsidiary model from the branch model, ABN Amro is open to the subsidiary route.

Most other foreign bank chiefs are less optimistic as the RBI guidelines on foreign presence in India do not offer freedom to foreign banks in opening branches.

"Nothing has changed. We will study the subsidiary route, but prima facie, we do not seem to have been given parity in terms of free branching," said Sanjay Nayar, CEO Citigroup India.

Citibank will stay focused on growing organically as India promises huge opportunity, he added.

Foreign banks had hoped that the wholly owned subsidiary route would enable them to freely set up branches in the country and, thereby, compete with private banks.

Thomas Harris, vice-chairman, Standard Chartered Plc, who was in India to meet the government last month, said: "We will go for anything that allows business to flourish better, and are awaiting clarity on the subsidiary route."

Foreign banks do not expect the RBI to impose norms for directed lending and rural branch network as they will not be given freedom to open branches.

"As a subsidiary, it is not clear if we would be asked to fulfil priority lending norms since we may not have the branch set-up to achieve the same," said Sobti.

The sole advantage that would encourage foreign banks to opt for the subsidiary route would be the reduced tax liability. Currently, foreign banks are taxed at the base rate of 41 per cent.

Following the revised tax rates announced in the Union Budget for domestic corporates, a wholly owned subsidiary would attract a lower tax rate of 33.6 per cent.

The subsidiary route will work out an easier path for foreign entities yet to establish their presence in the country. "They will not need to get a licence or go through the Foreign Investment Promotion Board route," said foreign bank officials.

Using the bank subsidiary route, foreign entities would be better placed in acquiring local banks through foreign direct investment.

The wholly owned foreign banking subsidiaries would be put on a par with private banks to the extent that they would have to shell out a capital of Rs 300 crore.

"This is not an issue for us, as we have far more capital in the country," said Nayar and Sobti. The capital base would be more applicable to foreign banks not having a presence in India.

Some Middle East banks with no presence in the country, have given out mandates to consulting firms to examine the opportunity of the subsidiary route.

Many are looking to tap the sizeable remittance taking place from the Middle East and propose to use Indian banks as a trade vehicle. Bank Muscat took the lead some time back by giving up its branch licence and taking about 33 per cent stake in Centurion Bank.