Rajan to Raise Pressure on Foreign Banks to Create Indian Units

  • RBI wanted to deal with priority lending issue first
  • DBS is only large foreign bank that has applied for India unit

India will “gently increase” the pressure on foreign banks to set up local subsidiaries, as it seeks to improve its regulatory oversight of their operations in the country, Reserve Bank of India Governor Raghuram Rajan said.

“Going forward the pressure will gently increase on them, certainly the large ones, to move to subsidiary,” Rajan said in an interview in his office in Mumbai on Tuesday. “There is still a remaining small dialogue we are having with them about what they should put in the subsidiary, but I think broadly we are working toward subsidiarization sooner rather than later.”

Raghuram Rajan

Photographer: Dhiraj Singh/Bloomberg

Since the Indian central bank announced the rules under which foreign banks can set up local subsidiaries two years ago, Singapore’s DBS Group Holdings Ltd. is the only sizable foreign bank to have taken steps to set up a local unit. The four largest foreign banks in the country -- Citigroup Inc, Standard Chartered Plc, HSBC Holdings Plc and Deutsche Bank AG -- have yet to apply.

The banks have been reluctant to create subsidiaries because of the extra capital they will need to set aside, as well as higher compliance costs, according to Nitin Kumar, a Mumbai-based banking analyst at Prabhudas Lilladher Ltd.

When it announced the rules, the Reserve Bank said the separate legal entities will give it greater control over the local operations of the foreign banks, which would be required to have their own capital and a local board of directors. The move would ensure a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent, thereby protecting Indian retail depositors, according to the RBI’s November 2013 statement.

Rajan said the RBI had put the issue on the back-burner until now because it wanted to deal with a separate concern among foreign banks about its priority-lending rules. Those require banks to direct a certain amount of their lending into sectors such as agriculture and small business, based on the number of their local branches.

“We had others things on our plate which we wanted to do first, including telling them what priority sector norms they will be subject to," Rajan said. “That’s a big concern for them as they don’t have the same number of branches,” he added.

Establishing a local unit in India would give the foreign banks the same freedom as the local banks to open more branches. At the moment, they can only open a combined 12 new branches a year.

Standard Chartered is the largest foreign bank in India by branches, with 100 operational outlets. HSBC has 50, while Citigroup has 45.

DBS, Southeast Asia’s largest lender by assets, expects to complete the conversion of its India business into a subsidiary by the end of March 2016, the bank’s chief executive officer Piyush Gupta told reporters in Mumbai in May.

The 43 foreign banks operating in India control only about 6 percent of the country’s banking assets, according to RBI data. The 27 state-run banks, led by State Bank of India, accounted for about 73 percent of the total, while 20 private lenders, including ICICI Bank Ltd., held 21 percent of the assets.

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