Foreign banks prefer subsidiary route for spread

Foreign banks propose to give up their branch licences and go the subsidiary route when clarity on the same is announced in the forth-coming revised regulations for the banking sector.

While the key advantage of opting for the subsidiary route is freedom to open branches, the Reserve Bank of India (RBI) is not expected to free in allowing the banks to set up as many branches as desired.

Theoretically the subsidiary route should allow a foreign bank to open branches as easily as is the case with private sector banks, banking officials said.

However, sources close to the development added that this will not be as easy as expected. "The RBI intends to regulate the number of branches a bank can set up in the country," said sources.

Foreign banks see the subsidiary route as enabling them to compete with private sector banks.

"The subsidiary licence will allow us to open unlimited branches especially when we want to be a big player in the Indian market," said Chris Low, CEO Standard Chartered Bank, India.

Moreover, as a subsidiary foreign banks would also get advantage of a lower tax liability and ability to raise funds domestically. Today foreign banks have to shell out 41 per cent corporate tax. Under the subsidiary licence, they would need only pay 35.87 per cent tax.

Standard Chartered Plc vice chairman, Thomas Harris, who was in the country last week added: "We would go for anything that allows business to flourish better. However, we are awaiting for clarity on he same".

He is not a lone voice. ABN Amro Bank's executive vice president and country representative, Romesh Sobti also said that the bank is awaiting clarity before finalising any plans. Incidentally the Netherlands-based ABN Amro is also keen to grow inorganically through acquisitions.

It has proposed to invest 1 billion euro through selective acquisitions in the country, the bank's global chief executive Rijkman Groenink said.

Citibank is also looking at the subsidiary route. Currently all foreign banks operate on a branch licence basis whereby for the first three branches set up they have to bring in $25 million in capital in three tranches.

Further expansion does not require additional capital, but today foreign banks are at the mercy of RBI when it comes to expansion. Under the subsidiary route however, it is proposed that foreign banks would only need to bring in Rs 100 crore.

They would be able to access local markets for raising funds. It had been proposed that they could raise subordinated debt up to 50 per cent of Tier-I capital.

At the same time, as a subsidiary based in India, foreign banks would also have to meet rural obligations and lend to the priority sector as directed by the RBI.