)
Even a year after the Reserve Bank of India released the final guidelines for foreign banks to convert their Indian branches into wholly owned subsidiaries (WoS), it is yet to find any takers.
Last year in November, the regulator had released the final blueprint giving foreign lenders level playing field by allowing them to convert their Indian branches into subsidiaries.
But apart from the Singapore based DBS Bank, no other foreign lender has expressed an interest to take up the WoS route. Some such as Citibank have decided not to explore the WoS route as of now.
However, a year on DBS is also still negotiating to find a viable business model for converting into a subsidiary where as other banks continue to show reluctance.
This is not the first futile attempt by RBI at nudging foreign banks to take up the WoS route. Earlier between March 2005-2009, the regulator had given the foreign lenders an option to convert the Indian branches into subsidiaries but none of the banks explored the option as they believed there were no incentives to drive them.
This time around, the regulator has promised the banks that if they convert their branches into WoS they will be treated nearly on par with other Indian banks and will also be given capital gains tax and stamp duty benefits. Apart from this, the foreign banks will also be permitted to acquire local private banks. But despite these sweeteners, foreign lenders don't seem to be very enthused even this time.
The banks believe that the strict priority sector lending (PSL) norms is a major hiccup. The central bank had said the PSL requirement for foreign banks would be 40 per cent like their Indian counterparts. Currently for a foreign bank, the PSL lending requirement is 32 per cent (foreign banks with more than 20 branches, it is 40 per cent). But once banks take the WoS route they will have to achieve 40 per cent within five years of converting into a subsidiary.
Out of this, 18 per cent of loans have to be offered to the farm sector.
Banks believe that the stiffer PSL norms may not be feasible from a commercial stand as it would end up affecting the profitability of the bank.
Lenders have asked for a relaxation of the definition of PSL lending and have urged RBI to broaden the definition by bringing other loans such as infrastructure, exports etc also under the ambit. They have also asked if the five year deadline can be further relaxed.
The other big roadblock that lenders see for not exploring the WoS option yet is that they would need to open at least one-fourth of their branches in the unbanked rural markets.
Foreign banks complain that at present they may not have the expertise yet to tap the hinterland and would need more time to meet this requirement. Moreover, it takes more time for the banks in the rural area to break even and therefore lender don't see it as a very economically viable option.
Foreign banks that entered India after August 2010 will have to mandatorily convert their branches into WOS. At present there are nine such lenders that have started their operations in India after August 2010. However, RBI has not yet put up a cut-off date by when banks have to convert their branches into WoS.
Raghuram Rajan, Governor, RBI had earlier said that if the carrot approach does not work for the banks, then it may have to wield the stick.
A year later, with foreign lenders still reluctant to convert their Indian branches into subsidiaries, some believe that it may be time for the regulator to take out the stick.
