RBI seeks details of foreign banks' finance arms

The Reserve Bank of India (RBI) has asked foreign banks to submit information on their non-banking finance (NBFC) arms. "The RBI is taking inventory of what foreign banks are doing through their NBFC arms," said a banking source.

Foreign banks such as Citibank and Standard Chartered Bank have set up NBFCs, while HSBC has indicated its intentions to do so. ABN Amro, one of the leading banks in the retail space, is evaluating the proposal.

The banking regulator is investigating as to whether foreign banks are using the NBFC route as a surrogate method for opening branches in the country.

Of late, foreign banks, unlike their counterparts, are restricted from opening branches in India. According to the latest circular, the government has allowed a quota of opening 20 branches a year for all the foreign banks combined.

The key advantage of tapping the NBFC route gives foreign banks unlimited access to expand their presence in the country. Today, the NBFC arms of foreign banks do not accept any deposits.

However, they do undertake lending activities, be it to expand their reach into the retail lending space as in the case of Citibank or enhancing corporate lending activities as in the case of Standard Chartered Bank.

Standard Chartered Bank (SCB) had recently inducted additional capital into Standard Chartered Investments and Loans (India) Ltd (SCILL), with part of its funding to come through capital raised from the domestic market. The 100 per cent owned NBFC arm started with a capital of $50 million, and had lent up to its prudent limit - which at 8 times the capital, crossed $400 million.

Unlike in the case of foreign banks, which cannot tap the domestic market in raising funds, its' NBFC arms are able to do so, as SCILL has done. Further, banks cannot fund corporate entities in buying out promoters' stake but NBFCs do not have this limitation. SCILL has seen a lot of business coming from large corporates and multinational companies looking at buying out stake of promoters.

SCILL is helping Stanchart supplement its growth in the country, especially at a time when the wholesale banking industry is flourishing.

The RBI however, wishes to ensure that there are no violations of prudential norms in that there is no centralised credit appraisal system. There are fears about foreign banks using their NBFC arms to centralise the credit appraisal and then distribute the lending between two arms.

"ABN Amro is evaluating the proposal of setting up an NBFC arm. We would rather do the maximum business through the bank branches as the cost of funds is the lowest. The disadvantage is not haing reach," said Romesh Sobti, executive vice president and country representative, ABN Amro Bank N.V. (India).