 "Foreign lenders wait for better clarity")
A day after the Reserve Bank of India (RBI) released detailed guidelines on subsidiarisation of foreign banks in India, lenders continue to grapple with unanswered questions.
The foremost, among these, was taxation and stamp duty relaxation, an aspect that didn’t get a mention in the central bank’s framework for setting up wholly owned subsidiaries by foreign banks in India.
“The guidelines do not deal with many of our questions. Most of us are still not sure about tax treatments. We will need more details on that front before taking a decision,” said a senior executive at a large foreign bank in India, requesting anonymity.
RBI does not have the authority to offer tax incentives to foreign banks for creating subsidiaries. A year ago, the finance ministry had agreed to offer tax neutrality for subsidiarisation of foreign banks, but lenders had also demanded tax deduction for the cost incurred on conversion, as well as relief from payment of stamp duty. So far, there is no clarity on whether the government will agree to these demands.
“We will evaluate if subsidiarisation makes sense for us after we hear from the government (on tax exemption),” said a banker heading the retail banking operations of a European bank in India.
While RBI said foreign banks opting for subsidiarisation might be permitted to acquire a local private sector bank, not many appeared excited at this opportunity. “It will not be the case — once a subsidiary is formed, the foreign lender cannot immediately acquire domestic banks. They have to meet all criteria, especially those pertaining to the priority sector and prove their credentials. After that, the central bank may consider allowing them to take the M&A (merger and acquisition) route,” said the chief executive of a foreign bank.
Currently, a foreign bank cannot acquire a domestic bank. Also, while foreign investors can hold up to 74 per cent in an Indian private bank, a single entity is not allowed to own more than five per cent stake in a local lender.
“Without it, the subsidiarisation proposal would have been a non-starter. It would take several years for us to grow organically to reach a position where we can compete with local banks. Permitting M&As is a good move. But we have to read the fine print in detail to evaluate if this opportunity is real,” said a senior executive at a large foreign bank in India.
Meeting priority sector lending obligations is another area seen as a hurdle to foreign banks, as the focus is on un-banked areas. In such areas, branches record break-even in 24-36 months; in some cases, break-evens aren’t recorded at all. In such a situation, a foreign lender has to ensure other branches are compensating for these branches.
Most bankers said the requirement of at least Rs 500 crore as initial paid-up voting equity capital for creating a wholly owned subsidiary wouldn’t be an issue for foreign lenders. However, they felt to compete with local banks, the investment requirement would be much higher.
At a time when many global banks are focusing on capital conservation, they might not be keen to make large investments in setting up wholly owned subsidiaries in India, bankers said.
“There are many positives in the guidelines. It promises near-national treatment, in terms of branch expansion, and permits M&As with Indian banks. But opening more branches will not necessarily ensure higher profitability. Inorganic growth is not always easy. Performing banks will not be up for sale; only those with stresses in their books will be on the block. It is still early for us to decide on subsidiarisation,” said a banker.
GREY AREAS
* No clarity if tax sops will be given when assets of branches shifted to subsidiary
* Acquiring local banks will not be permitted immediately
* Many global banks focusing on capital conservation, may not be keen on large investments
* Repatriation of capital may not be allowed
* Break even of branches in unbanked areas is an issue
* Parent’s rating will be affected if subsidiary faces stresses on asset quality
The foremost, among these, was taxation and stamp duty relaxation, an aspect that didn’t get a mention in the central bank’s framework for setting up wholly owned subsidiaries by foreign banks in India.
“The guidelines do not deal with many of our questions. Most of us are still not sure about tax treatments. We will need more details on that front before taking a decision,” said a senior executive at a large foreign bank in India, requesting anonymity.
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Once the assets of the branches are shifted to a wholly owned subsidiary, the value of the assets may be higher than when it was put in the branch. Therefore, such gains are taxed.
RBI does not have the authority to offer tax incentives to foreign banks for creating subsidiaries. A year ago, the finance ministry had agreed to offer tax neutrality for subsidiarisation of foreign banks, but lenders had also demanded tax deduction for the cost incurred on conversion, as well as relief from payment of stamp duty. So far, there is no clarity on whether the government will agree to these demands.
“We will evaluate if subsidiarisation makes sense for us after we hear from the government (on tax exemption),” said a banker heading the retail banking operations of a European bank in India.
While RBI said foreign banks opting for subsidiarisation might be permitted to acquire a local private sector bank, not many appeared excited at this opportunity. “It will not be the case — once a subsidiary is formed, the foreign lender cannot immediately acquire domestic banks. They have to meet all criteria, especially those pertaining to the priority sector and prove their credentials. After that, the central bank may consider allowing them to take the M&A (merger and acquisition) route,” said the chief executive of a foreign bank.
Currently, a foreign bank cannot acquire a domestic bank. Also, while foreign investors can hold up to 74 per cent in an Indian private bank, a single entity is not allowed to own more than five per cent stake in a local lender.
“Without it, the subsidiarisation proposal would have been a non-starter. It would take several years for us to grow organically to reach a position where we can compete with local banks. Permitting M&As is a good move. But we have to read the fine print in detail to evaluate if this opportunity is real,” said a senior executive at a large foreign bank in India.
Meeting priority sector lending obligations is another area seen as a hurdle to foreign banks, as the focus is on un-banked areas. In such areas, branches record break-even in 24-36 months; in some cases, break-evens aren’t recorded at all. In such a situation, a foreign lender has to ensure other branches are compensating for these branches.
Most bankers said the requirement of at least Rs 500 crore as initial paid-up voting equity capital for creating a wholly owned subsidiary wouldn’t be an issue for foreign lenders. However, they felt to compete with local banks, the investment requirement would be much higher.
At a time when many global banks are focusing on capital conservation, they might not be keen to make large investments in setting up wholly owned subsidiaries in India, bankers said.
“There are many positives in the guidelines. It promises near-national treatment, in terms of branch expansion, and permits M&As with Indian banks. But opening more branches will not necessarily ensure higher profitability. Inorganic growth is not always easy. Performing banks will not be up for sale; only those with stresses in their books will be on the block. It is still early for us to decide on subsidiarisation,” said a banker.
GREY AREAS
* No clarity if tax sops will be given when assets of branches shifted to subsidiary
* Acquiring local banks will not be permitted immediately
* Many global banks focusing on capital conservation, may not be keen on large investments
* Repatriation of capital may not be allowed
* Break even of branches in unbanked areas is an issue
* Parent’s rating will be affected if subsidiary faces stresses on asset quality