RBI finalising subsidiary route for foreign banks

The Reserve Bank of India (RBI) will issue final guidelines on the subsidiary route for entry of foreign banks into the country once the government resolves all legal and taxation issues, governor D Subbarao said today.

''We have yet to resolve a few legal issues, which we hope can be done in the next few months. Thereafter, we expect to issue final guidelines,'' Subbarao said.

While this may take a few months at the government's end, the governor said, the RBI would like existing branches of foreign banks also to shift to the local incorporation mode for regulatory convenience.

RBI proposes to permit foreign banks to set up subsidiaries or branches in India, but they have to choose one of the two routs. One bank cannot adoptt both a subsidiary and branch model in the country at the same time.

RBI prescribed the local incorporation model for foreign banks as far back as in 2005 in order to ring fence Indian branches of foreign banks from the financial market turmoil in the West.

A locally-incorporated bank would be better insulated against market turmoil elsewhere while a local branch of a foreign bank would be indirectly hit to the extent the market turmoil affects its parent body and sister branches overseas. The crisis would be transmitted to India through interbank transactions.

An Indian branch of a foreign band would be controlled directly by its head office abroad, but a foreign bank locally incorporated would have financial and managerial independence from its overseas parent.

While all banks operating in the country, whether local or foreign, are subject to Reserve Bank regulations, branches of foreign banks in India would be subject to regulations of the parent bank as well and thereby also be subject to foreign regulation.

RBI had, in 2011, floated a discussion paper to assess the viability of the subsidiary model for foreign banks looking to enter the Indian market.

''The proposed framework leans towards the subsidiarisation model for fresh entrants while nudging existing foreign banks with a balance sheet size above a threshold to convert from a branch model to a subsidiary model,'' the RBI said.

At present, there are 43 foreign banks with a presence in India and almost all these banks operate as branches of their foreign parents.