India will let foreign lenders led by Citigroup Inc. (C) set up more branches in the most sweeping opening of the banking industry since 2004 as central bank chief Raghuram Rajan seeks to spur competition and revive the economy.
Overseas banks will be allowed to set up subsidiaries with minimum capital of 5 billion rupees ($80 million) and a capital adequacy ratio of 10 percent, the Reserve Bank of India said in a statement yesterday. Locally incorporated units would be permitted to open branches “anywhere in the country at par with Indian banks,” it said.
Rajan’s policy shift eases the way for overseas banks to compete in a market where Citigroup and HSBC Holdings Plc (HSBA) haven’t opened a branch for three years and operate 0.1 percent of India’s 92,000 outlets. The changes mirror moves by Prime Minister Manmohan Singh’s government to open sectors from aviation to retail to increased foreign investment as India’s economy grows at the slowest pace since 2009.
“A large market always piques interest, and more so for under-penetrated markets,” Ismael Pili, head of Asia bank research at Macquarie Group Ltd. in Hong Kong, wrote in an e-mail before the RBI statement. “India certainly fits that bill with its huge population base.”
The S&P BSE Bankex Index, which tracks 13 bank stocks, dropped 1 percent as of 10:49 a.m. Mumbai time. The benchmark S&P BSE Sensex gauge was little changed.
DBS Group Holdings Ltd. (DBS), Southeast Asia’s largest bank, is ready to act as soon as limits are lifted, Vijit Yadav, chief operating officer of the lender’s Indian operations, said in an interview in Mumbai on Oct. 7. The Singapore-based group, which has opened 12 Indian branches since 1995, “is bullish” on the new model and aims to add 50 outlets within three years of getting approval, Yadav said.
As much as 65 percent of India’s population of 1.2 billion doesn’t have access to a bank account, the World Bank estimates.
India had previously limited foreign banks operating within its borders to opening a combined 12 new branches a year. New York-based Citigroup and London-based HSBC haven’t opened an outlet in the nation since 2010. The two lenders operate just 93 of India’s more than 92,000 branches, central bank data show.
Rajesh Joshi, a Mumbai-based spokesman for HSBC, and James Griffiths, a Hong Kong-based spokesman for Citigroup, declined to comment on the new rules.
Rajan said on Sept. 4, when he took over at the monetary authority, that he would seek to encourage foreign banks to move to a wholly-owned subsidiary structure, giving them greater ability to expand in return for increased regulatory oversight of their local operations.
India has 26 state-run banks, led by State Bank of India, that accounted for 76 percent of outstanding loans as of March 31, according to RBI data. The country’s 20 private lenders, including ICICI, held 19 percent of the loan market, while 43 foreign banks accounted for the rest.
In 2004, the government raised the limit for foreign direct investment in India’s non-state banks to 74 percent and began allowing overseas banks that met certain criteria to set up wholly owned units.
Yesterday, the RBI said it will consider allowing foreign banks’ local subsidiaries to buy as much as 74 percent of private-sector banks. India’s largest non-state lenders include Mumbai-based ICICI Bank Ltd. (ICICIBC), HDFC Bank Ltd. and Yes Bank Ltd.
Loosening the branch restrictions is an effort to lure banks that may be concerned about losing control of their local operations if they set up a subsidiary, said Vishal Narnolia, a Mumbai-based analyst at SMC Global Securities Ltd.
Standard Chartered Plc (STAN), the largest foreign bank operating in India by branches, said it’s too early to comment in detail without reviewing the guidelines and its implications, according to an e-mailed response to queries.
Relaxing the rules for branches takes forward a road map first unveiled in 2005 for the evolution of foreign banks’ Indian operations. The government then sought to make local incorporation more palatable by amending the income tax law in 2012 to exempt foreign banks from capital gains taxes when they shift to operating through subsidiaries.
At least a third of the local subsidiaries’ directors should be independent of the unit’s management and at least a third should be Indian citizens residing in the country, according to the RBI statement yesterday.
The central bank is endorsing the subsidiary model to improve oversight of foreign bank operations and curb capital flight in times of financial stress, according to Dina Wadia, a Mumbai-based partner at law firm J. Sagar Associates who has helped several foreign banks to set up India branches. She declined to name them, citing company policy.
Having just branches “allows the lenders to move all their assets outside India overnight,” Wadia said by phone on Oct. 18. The RBI doesn’t want “a situation where there is no money in the coffers of a foreign bank to pay back the depositors when the next crisis brews.”
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