SBI to fortify UK operations as BoE cracks down on foreign banks

State Bank of India (SBI) will set aside £100 million in ring-fenced capital and restructure its operations in order to keep operating on the high streets even as UK's central bank, the Bank of England, is cracking down on foreign-owned banks in the country.

Under the new rules formulated as part of the financial sector reforms undertaken in the aftermath of the 2008 market meltdown, BoE, like other central banks, is prescribing stricter regulations for foreign banks' operations.

They have been asked to provide for sufficient capital specifically for their UK operation or restructure as subsidiaries of foreign banks.

The Prudential Regulation Authority (PRA) of the Bank of England had directed foreign owned banks operating in the UK to restructure and enlarge capital in order to ring-fence their operations in case they are accepting deposits above £100 million.

Failure to restructure operations and enlarge capital would cost these banks the licence to carry on retail operations.

SBI, which has been operating in the UK for 95 years, said it is prepared to set aside £100 million in ring-fenced capital and restructure its operations if that is necessary to keep operating on the high streets.

Mrutyunjay Mahapatra, the UK head of the bank, told 'The Times' newspaper that the bank will keep serving retail customers in Britain as well as open new branches.

Under the new rules, banks from outside the European Economic Area (EEA) must offer only minimal retail services. A consultation launched in February by PRA, responsible for supervising individual banks, concluded in September.

SBI, which has over £900 million of deposits in Britain, is among those affected.

"Our intention is to continue to do business in the UK. We have been here for 95 years. We're too deep rooted here," Mahapatra said.

Bank of Baroda, which has 10 branches in Britain, and Bank of India, with seven, could also be hit.

Isbank of Turkey and Overseas Chinese Banking Corporation of Singapore are also likely to be affected.

These banks would either have to shut down their retail banking operations in Britain or convert from branch status to full UK subsidiary - an expensive and cumbersome process.

The new rules mean it will be easier for wholesale foreign banks, which cater to other financial institutions and large corporations rather than retail customers, to open non-deposit taking branches which would not face size limits but are likely to make it very difficult for some retail bank branches to operate.

Subsidiaries are subject to more complex clearances and branches, on the other hand, are part of a home office legal entity and do not 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 new proposals are aimed at protecting the UK from imported banking crises while allowing foreign financial institutions to operate in the country.