Foreign Banks Get Level Pegging On Capital

The Reserve Bank of India (RBI) today announced revised guidelines for foreign banks bringing in capital from their parents abroad, bring them at par with Indian banks in respect of treatment of capital.

The RBI said that the amount of capital borrowed from the parent (head office) in foreign currency will be eligible for inclusion in the Tier-II capital (as subordinated debt) and will be subject to the maximum ceiling of 50 per cent of the Tier-I capital maintained in India.

Further, the RBI said the total Tier-II capital should not exceed 100 per cent of Tier-I capital. Indian banks already have these two conditions on the capital structure.

Similarly, the RBI said the total amount of head office borrowings will be taken as 'liability' for the calculation of net demand and time liabilities, which goes into the calculation of reserve requirements such as cash reserve ratio and statutory liquidity ratio.

Levelling the playing field, the RBI further applied the discounting principle to foreign bank's head office borrowings. Such borrowings will be subject to progressive discount as applicable to Indian banks as they approach maturity at the rates.

The new rules have now created a level playing field between foreign and the Indian Banks. The cost of funds for both these sectors would now be nearly equivalent. "If the foreign bank brings in capital from overseas, taking into consideration the rupee devaluation, the cost of funds at the end of the five years would be the same as for the Indian banks," said a senior banker.

However, the RBI has specified that such head office borrowings should have a minimum initial maturity of 5 years. That is, the debt should be for at least a period of five years when initially contracted. If the borrowing is in tranches, each tranche will have to be retained in India for a minimum period of five years.

But perpetual subordinated debt, where there may be no final maturity date, will not be permitted, the RBI said.

The head office borrowings should be fully paid up, i.e. the entire borrowing or each tranche of the borrowing should be available in full to the foreign bank's branch in India. It should be unsecured, subordinated to the claims of other creditors of the foreign bank in India, free of restrictive clauses and should not redeemable at the instance of the head office.

The entire amount of head office borrowing should remain fully swapped with banks at all times. The swap should be in Indian rupees.

In its April 2001 credit policy, RBI had barred foreign banks from including their external commercial lending to Indian corporates as part of the Tier-I capital. These norms had forced the foreign banks either to infuse fresh capital into Indian operations to maintain the capital adequacy ratio (CAR) or to pare their asset base.

The RBI had also earlier debarred foreign banks from raising local rupee resources for Tier-II capital requirements. Some of the bankers are seeing today's guidelines as a sort of a leeway for foreign banks. "Instead of bringing in Tier-I capital, these banks can now bring in the Tier-II capital," said a foreign banker.