Capital bar may be raised for foreign banks

The Reserve Bank of India (RBI) is likely to enhance the capital requirement for foreign banks keen to set up subsidiary following permission granted by the government.

According to banking sources, foreign banks will need to invest Rs 200 crore initially and over the next few years, the capital requirement will go up to Rs 300 crore if they opt for the subsidiary route.

Foreign banks have three options to start operations in India "" the branch route, the subsidiary route or the acquisition of stake in an Indian bank route.

If a foreign bank opts for the branch route for entry, it has to spend $10 million per branch for setting up its first two branches and $25 million from the third branch onwards, sources said.

Where the entry is through the subsidiary route, there will be ample freedom to expand branches as against the present restriction of 15 branches per bank. To expand beyond 15, RBI approval is mandatory.

While this goes well with the WTO regime under which markets have to opened up for foreign banks on a reciprocal basis, there will, however, be a rider in the form of mandatory requirement for allocating 25 per cent of branches in the semi urban and rural areas.

At present, this is the norm for Indian banks' branch network.

If foreign players take the subsidiary route, they will have to set up a local board and management, which has recently been done away with for entries through the branch route.

The government permitted foreign banks to set up 100 per cent subsidiaries in India with a rider that they can acquire a maximum of 74 per cent in existing private banks.

The government has also put the sector in an automatic route, thus doing away the need for Foreign Investment Promotion Board approval.