New financial regulations to be launched in the UK could make it tougher for Indian banks to operate branches in the country.
A consultation paper published today by the Bank of England's Prudential Regulatory Authority, responsible for supervising individual banks, wants banks from outside the European Economic Area (EEA) to offer only minimal retail services.
This would directly impact the operations of banks like State Bank of India, Bank of India and Bank of Baroda, which operate larger deposit taking retail services across Britain.
"The new supervisory approach is expected to require some branches to either exit the market or become a subsidiary," the PRA said in its consultation, which will run until May 27 when a final decision will be announced.
However, the new rules also leave the door open to a more relaxed and trust-based relationship with supervisors in such countries as the US and China in the realm of international wholesale banking.
"The ability for financial services firms to branch into other countries is, if done safely, an important component of an open world economy, which in turn benefits the UK economy," the PRA said.
Although the regulatory authority did not single out any country by name, the PRA sketches out the conditions that would govern London's attempts to become a hub for trading the Chinese renminbi.
A key element of the government's strategy is to encourage Chinese banks to set up branches in London.
According to a report in 'The Financial Times', the new proposals are an attempt to strike a balance between welcoming foreign finance and protecting the UK from imported banking crises.
India will have to offer a "very high level of assurance" about its crisis management plans to be able to continue retail operations in the UK under the new regime.
Alternatively, some banks could convert their UK branches into subsidiaries, which are subject to more complex clearances.
Branches, on the other hand, are part of a home office legal entity and don't require their own capital base in the UK or a separate board.
Therefore, mostly foreign banks prefer to operate as branches because subsidiaries are more expensive to run, requiring their own pools of capital and liquidity, as well as their own boards and legal entity, and have the routine extra cost of reporting to "host country" supervisors.
The PRA has been in discussions with foreign authorities, including Indians, on the impending changes.
"We have to follow the rules of the local law," said Rajneesh Sharma, deputy chief executive of Bank of Baroda's UK operations.
