Role

of foreign banks in Indian banking scenario

Bachelor of Commerce (Banking & Insurance) Semester V (2011-12)

Submitted by Mohit K. Makhija

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50

Role

of foreign banks in Indian banking scenario

Bachelor of Commerce (Banking & Insurance) Semester V (2011-12)

Submitted In Partial Fulfillment of the requirements For the Award of Degree of Bachelor of Commerce Banking & Insurance

By Mohit K. Makhija

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50 CERTIFICATE (2011 2012) This is to certify that MOHIT K. MAKHIJA of B.com (Banking & Insurance) Semester V (2011-12) has successfully completed the project on Role of foreign banks in Indian banking scenario under the guidance of DR. A.C. VANJANI. Date: - 10th October, 2011. Place: - MUMBAI

(Prof. Mr. Vishal R Tomar) Course Co-ordinator

(Dr. Ashok Vanjani) Principal

(Prof. Mr. Ashok Vanjani) Project Guide External Examiner

DECLARATION
Date: - 10th October, 2011.

I, Mr. MOHIT K. MAKHIJA the student of B.Com (Banking & Insurance) Semester V (2011-12) hereby declare that I have completed the project on Role of foreign banks in Indian banking scenario successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

MOHIT K. MAKHIJA

ACKNOWLEDGEMENT

To make any such in depth project without the help of anybody is not at all possible. Moreover teamwork is more beneficial than the isolation. In other words there are so many external people who directly or indirectly help us in our project. First of all I am very grateful to our principal Dr. A. C. Vanjani and coordinator Mr. Vishal Tomar for their guidance whenever we called for and for giving me such an informative topic. I have always been welcomed with very pleasant smile and full co-operation by them. Working on the project is hard, need hard work and concentration but I made it possible with the support which I had received from those around me. I am thankful to all the faculties of our college for giving me guidance encouragement and right path to work on it. I thank everybody who has directly or indirectly helped us in this project to make it successful. I am grateful to the whole staff of MMK College of commerce and economics, as they co-operated with us in preparation of our project.

MOHIT K. MAKHIJA

DECLARATION

Date: - 10th October, 2011.

I the undersigned Dr. ASHOK VANJANI, have guided Mr. MOHIT K. MAKHIJA for her project, she has completed the project Role of foreign banks in Indian banking scenario successfully.

I hereby, declared that information provided in this project is true as per the best of my knowledge.

Thank you,

Yours faithfully, Dr. ASHOK VANJANI

Index
Sr no. 1. 2. 3. 4. Particulars Introduction Foreign Banks Branches in India The need for foreign banks WTO and India about foreign banks operations

5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

List of Foreign Banks having Representative Offices RBI favours subsidiary route for foreign bank expansion Foreign banks set to play bigger role Roadmap for Presence of Foreign Banks in India RBI roadmap: Foreign banks get to eye private banks PROS AND CONS OF FOREIGN BANKS Rough road ahead for foreign banks setting up units here Foreign banks keen to strengthen foothold in India Headcount of foreign banks down over 6% in 2010: RBI RBI may make it mandatory for foreign banks to adopt WOS (wholly owned subsidiary) route

15. 16.

How foreign Banks can Enter in India India to Audit Foreign Banks Operations Prior to Permitting New Branches

17. 18. 19. 20.

Proposed Framework for Presence of foreign banks in India Measures to contain dominance of foreign banks Conclusion Bibliography

A Role of Foreign Banks in Indian banking scenario.

Introduction
Foreign Banks operating in India are banks of other countries having their branches in India. At present there are about 37 such banks having a total of about 320 branches in most of the big cities of the country. These Foreign Banks have a flourishing business and earn large profits. Indian Banks also have their branches in other countries, and they, too, are doing well. A large number of foreign banks are now keen on opening shop in India, when private banking space is expected to open up for foreign players. Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. A new rule announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allow them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. There are 47 foreign banks having representative offices in India. The Banco Bilbao Vizcaya Argentaria, Spain's second largest bank; and National Australia Bank Ltd., are some of the banks that would like to convert their representative offices into branches.

Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 96. It is followed by HSBC, which entered India in 1867, with 50 branches. Citibank has 42 branches and the Royal Bank of Scotland N.V. with 31.

Foreign Banks Branches in India as on June 30, 2011

Sr no.

Name of the bank

Country of incorporation Bangladesh Netherlands UAE USA Belgium Indonesia USA Bahrain Sri Lanka Canada United Kingdom France France

1 2 3 4 5 6 7 8 9 10 11 12 13

14 15 16 17 18 19 20

AB bank Ltd. The Royal Bank of Scotland N.V Abu Dhabi Commercial Bank Ltd. American Express Banking Corporation Antwerp Diamond Bank N.V. Bank Internasional Indonesia Bank of America Bank of Bahrain & Kuwait BSC Bank of Ceylon Bank of Nova Scotia Barclays Bank Plc. BNP Paribas Credit Agricole Corporate & Investment Bank Chinatrust Commercial Bank Citibank N.A. DBS Bank Ltd. Deutsche Bank HSBC Ltd J.P. Morgan Chase Bank N.A. JSC VTB Bank

No. of branches in India. 1 31 2 1 1 1 5 2 1 5 10 8 6

Taiwan USA Singapore Germany Hong Kong USA Russia

1 42 12 16 50 1 1

Sr no.

Name of the bank

Country of incorporation Thailand UAE Japan Sultanate of Oman South Korea France Bangladesh United Kingdom Mauritius Japan Switzerland South Africa Singapore Australia Russia Switzerland Australia

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

Krung Thai Bank Public Co. Ltd. Mashreq Bank PSC. Mizuho Corporate Bank Ltd. Oman International Bank SAOG Shinhan Bank Societe Generale Sonali Bank Ltd. Standard Chartered Bank State Bank of Mauritius The Bank of TokyoMitsubishi UFJ Ltd. UBS AG FirstRand Bank Ltd United Overseas Bank Ltd Commonwealth Bank of Australia Sberbank Credit Suisse A.G Australia and New Zealand Banking Group Ltd.

No. of branches in India. 1 2 2 2 3 2 2 96 3 3 1 1 1 1 1 1 1 320

The need for foreign banks in India

Some economists are of the view that Foreign Banks should, not be allowed to operate in the country. But permission to such banks to operate in the country is unavoidable on the basis of reciprocity. This is certainly the view of the Reserve Bank of India, and it is justified by the success of Indian Banks operating in foreign countries. Indian Banks have been rapidly expanding their overseas operations. Between 1975 and 1978, the number of offices of Indian Banks in foreign countries had increased by 48, from 77 to 125. This is in contrast with the stagnant number of Foreign Bank Offices in India. As a consequence, the growth of business of Indian Banks has been phenomenal as compared to that of the branches of their foreign counterparts in India. Deposits and advances of Indian Banks abroad have increased by 14% and 18% respectively, whereas the corresponding figures of Foreign Banks in India are 28% and 30% respectively. In terms of remittances of the present banks also, Indian banks are ahead. In 1976, they remitted Rs. 90 millions to India, where their counterparts remitted Rs. 70 millions only. Indian Banks abroad are involved in many new banking activities. State Bank of India and Bank of Baroda, the two leaders in the sphere, are raising foreign currency funds, for both private and public sector concerns. In addition, these banks are funding many joint ventures in South East Asia. For instance, SBI is funding joint ventures in Singapore, Indonesia and Malaysia. The Bank has arranged finances to the tune of $ 750 million dollars.

We can see clearly that Indian Banks are indeed generating a lot of business overseas. At present they are operating in as many as 26 countries of which only eight countries have their own bank branches in India. Thus, the question of reciprocity does indeed have relevance, because, if we want to seek profitable opportunities overseas, we must be prepared to open our own gates also. In short, the operation of foreign banks in India is fully justified. It is in our national interest.

WTO and India about foreign banks operations

India had committed to the World Trade Organization (WTO) in 1997 to give 12 new branch licenses to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms). Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 96. It is followed by HSBC, which entered India in 1867, with 50 branches. Citibank has 342 branches. Despite their growing presence, foreign banks still have a very small market share in the Indian banking industry6.11% of total deposits and 6.83% of total loan advances. But their returns from Indian operations are far higher than those of their local counterparts. For instance, the average net profit per branch for foreign banks in India was Rs11.99 crore last year against Rs33 lakh for the public sector banks that account for close to 70% of the industry. The return on

assets for foreign banks last year was 1.65% and return on equity, 14.02%. The comparable figures for public sector banks were 0.82% and 13.62%. Now you know why foreign banks are ready to walk the extra mile to do business anywhere in India The Reserve Bank of India would like foreign banks to get a flavour of semiurban India and the rural hinterland. Going by the statistics provided in the RBI's annual report, it appears that foreign banks are being gently nudged away from metros, when they apply for permission to open a new branch. The branches of foreign banks that have been approved between July 2006 and June 2007 are mostly in smaller towns and tier-2 and tier-3 cities..

Smaller cities
Hong Kong and Shanghai Banking Corporation (HSBC) received approvals for three branches in Raipur, Jodhpur and Lucknow. ABN Amro got approvals for branches in Kolhapur, Salem, Udaipur and Ahmedabad. Barclays Bank received approval for branches in Kanchipuram and Bangalore. Most foreign banks follow a strategy of first setting up base in metros Mumbai, New Delhi, Kolkata and Chennai. Then, in the next stage, they move to the mini-metros such as Bangalore, Hyderabad, Pune and Ahmedabad. Over the last few years, some banks have talked about expanding their reach beyond the conventional circuits of these eight places. Foreign banks in India have got approval from the Reserve Bank of India to open 10 branches and seven representative offices during the July 2006- June 2007 period. In the calendar year 2006, the RBI issued approvals for opening 13 branches of foreign banks in India. Under the WTO agreements, India is required to allow the opening of 12 foreign branches every year.

List of Foreign Banks having Representative Offices in India as on June 30, 2011

Sr. No.

1.

Name of the Representative Office Commonwealth Bank National Bank Australia Ltd Westpac Banking Corporation Raiffeisen Zentral Bank Osterreich AG Fortis Bank

Country of incorporation Australia

Centre

Date of opening 7.11.2005

Bangalore

Australia

Mumbai

3.11.2006

2.

Australia

Mumbai

1.10.2007

3.

Austria

Mumbai

1.11.1992

4.

Belgium

Mumbai

6.10.1987

5. K.B.C. Bank N.V. 6. Royal Bank of Canada Emirates Bank International Credit Industriel et Commercial Natixis 10. Bayerische Hypo und Vereinsbank Germany Mumbai 12.07.1995 Canada Mumbai 1.2.2008 Belgium Mumbai 1.02.2003

7.

Dubai

Mumbai

16.06.2000

8.

France

New Delhi

1.04.1997

9.

France

Mumbai

4.01.1999

11.

Sr. No.

12.

13.

Name of the Country of Representative incorporation Office DZ Bank AG Germany Deutsche Zentral Genossenschafts Bank Landesbank Baden Germany Wurttemberg Commerzbank Germany

Centre

Date of opening 22.02.1996

Mumbai

Mumbai

1.11.1999

Mumbai

23.12.2002

14. Norddeutsche Landesbank Girozentrale (NORD LB) HSH Nordbank AG BayernLB 17. DEPFA Bank 18. Intesa S.p.A Sanpaolo Italy Mumbai 1.11.1988 Ireland Mumbai 9.3.2007 Germany Mumbai 1.9.2008

15.

Germany

Mumbai

7.4.2008

16.

Germany

Mumbai

15.4.2008

19.

20.

Uni Credito Italiano Banca Populare Di Verona E Novara

Italy

Mumbai

1.08.1998

Italy

Mumbai

18.06.2001

21.

Sr. No.

22.

23.

Name of the Country of Representative incorporation Office BPU Banca Italy Banche Popolari Unite S.c.r.l Monte Dei Paschi Italy Di Sienna Banca Popolare di Vicenza Hana Bank Italy

Centre

Date of opening 16.01.2006

Mumbai

Mumbai

07.04.2006

Mumbai

29.04.2006

24.

South Korea

New Delhi

25. Everest Bank Ltd. 26. Caixa Geral de Depositos DnB NOR 28. Vnesheconombank (Bank for Foreign Economic Affairs) Promsvyazbank Russia New Delhi 1.3.1983 Portugal Mumbai Goa (EC) Mumbai 8.11.1999 Nepal New Delhi 24.03.2004

27.

Norway

27.8.2008

29.

Russia

New Delhi

25.04.2006

30.
Woori Bank 31. Banco de Sabadell SA Banco Bilbao Vizcaya Argentaria Hatton National Bank Spain New Delhi 2.08.2004 South Korea New Delhi 10.2007

32.

Spain

Mumbai

2.4.2007

33.

Sri Lanka

Chennai

1.01.1999

34.

Sr. No.

Name of the Representative Office

Svenska Handlesbanken Skandinaviska Enskilda Banken AB Zurcher Kantonalbank The Bank of New York Wachovia Bank N.A.

Country of incorporation
Sweden

Centre

Date of opening
1.08.2006

Mumbai

35.

Sweden

New Delhi

1.02.2008

36.

Switzerland

Mumbai

27.06.2006

37.

USA

Mumbai

27.10.1983

38.

USA

Mumbai

1.11.1996

39.
Mega International commercial Bank KfW IPEX Bank GmbH Korea Exchange Bank Duncan Lawrie Ltd Taiwan Mumbai 2.12.2008

40.

Germany

Mumbai

1.4.2009

41.

South Korea

New Delhi

27.8.2008

42.

United Kingdom

Kolkata

30.10.2009

43.
First Gulf Bank UAE Mumbai 26.10.2009

44.
Toronto Dominion Bank CIMB Bank Berhad Canada Mumbai 16.11.2009

45.

Malaysia

Mumbai

23.11.2010

46.
Sumitomo Mitsui Banking Corporation Japan New Delhi 28.4.2011

47.

RBI favours subsidiary route for foreign bank expansion

Mumbai: Six years after laying down the road map for foreign banks in India, the countrys central bank is set to allow them a bigger role in the worlds second fastest growing major economy. The Reserve Bank of India (RBI) invited public comments on a discussion paper that suggested almost doubling the role of foreign banks in the Indian banking system, saying it will incentivize foreign players to operate through the wholly owned subsidiary route in the country. RBI had given until 7 March for comments. All new overseas entrants in the Indian banking space will have to locally incorporate themselves, and existing players, particularly the systemically important ones, will be encouraged to go in for local incorporation and act as subsidiaries of foreign parents, RBI said, reported this on 5 October. Systemically important banks are those whose assets become 0.25% of the total assets of all commercial banks as on 31 March, the central bank said. Going by this definition, eight foreign banks, including Citibank NA, HSBC Holdings Plc and Standard Chartered Bank fall under this category. As an incentive to set up wholly owned subsidiaries, RBI said it may allow them to raise rupee resources in the form of non-equity capital, adding that it will extend a less restrictive branch expansion policy to foreign players by allowing them to operate in semi-urban areas.

Noting that it may not be possible to mandate conversion of existing players into subsidiaries, RBI said the regulatory expectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants...would opt for converting their branches into wholly owned subsidiaries. On capital adequacy for new players, RBI said subsidiaries of foreign banks will be treated at par with new private sector banks and shall maintain a minimum capital adequacy of 10% of their risk-weighted assets. Once the policy is in place, RBI said it will be more liberal in its branch licensing policy, but it is difficult to award full national treatment to foreign banks because this could lead to unintended consequences for the banking sector. They will then be treated virtually on par with their domestic peers in terms of branch expansion regarding which the banking regulator has all along been following a restrictive policy. Deutsche Bank AGs managing director and chief executive officer refused to comment on the paper because he had not read it. Spokespersons for Standard Chartered and HSBC said they will comment only after going through the RBI suggestions in totality. Citibank executives could not be reached, a spokesperson said. Currently, there are 37 foreign banks in India and collectively they have at least 320 branches, 0.43% of the 71,998-strong branch network across the nation. As of 31 March 2011, the share of foreign banks in total banking assets stood at 10.52%, out of which that of the top five was 7.12%, RBI said. Among these,

Citibank has 1.6% of the total assets of the banking system, while that of HSBC is 1.52% and Standard Chartered Bank is 1.5%. Under a 1997 World Trade Organization (WTO) agreement, total assets of foreign banks in India cannot exceed 15% of the total banking system. But RBI, in its discussion paper, has changed the limit in terms of capital and reserves of banks. As per this, when the capital and reserves of foreign banks in India exceed 25% of capital of the banking system, the regulator will put restrictions on the further entry of new banks, branch expansion and will make it mandatory to get prior approval for capital infusion, RBI said. Presently, the net worth of 21 foreign banks stands at 15% of the total banking system. Their market share in banking assets is 7.65% for the year ended 31 March 2011. Under the WTO agreement, RBI needs to give 12 new branch licences to foreign banks every year, including those given to new entrants and existing players, but the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment, but not as many as the foreign banks want.

Foreign banks set to play bigger role

Mumbai: Five years after laying down the road map for foreign banks play in India, the countrys central bank is set to allow them a bigger role in the worlds third fastest growing $1 trillion-plus economy after China and Brazil. The Reserve Bank of India (RBI) will soon invite public comments on a discussion paper that will suggest almost doubling foreign banks share in Indian banking assets to 15%. All new overseas entrants in the Indian banking space will be asked to locally incorporate themselves while existing players will be encouraged to go in for local incorporation and act as subsidiaries of foreign parents and not their branches. Once they do so, they will be treated virtually on a par with their domestic peers in terms of branch expansion regarding which the banking regulator has all along been following a restrictive policy. The central bank is discussing the finer points of the proposal with the government and the discussion paper will be put up on its website very soon, a person familiar with the development told Mint last week. The person did not want to be named, considering the sensitivity of the issue. A senior RBI official, involved in the process of drafting the policy, confirmed this on Monday. Currently, there are 32 foreign banks in India and collectively they have 310 branches, 0.43% of the 71,998-strong branch network across the nation. Standard Chartered Bank leads the pack with 95 branches, followed by Hong Kong and Shanghai Banking Corp. Ltd, or HSBC, (50) and Citibank NA (43).

Their market share in banking assets is 7.74% and 8.37% in profits for the year ended 31 March. Foreign banks in India account for 5% of the total deposits in the banking system, 4.67% of advances and 9.27% of investments. Under a 1997 commitment given to the World Trade Organization, RBI needs to give 12 new branch licences to foreign banks every year, including those given to new entrants and existing players, but the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment, but not as many as the foreign banks want. Once the policy is in place, the regulator will be more liberal in its branch licensing policy, but foreign banks may not quite get the national treatment. The challenge will be maintaining the 15% cap in assets. What do we do when their market share in assets come close to 15%? We wont be able to give them a free hand (for branch licences). This is the challenge. We are looking into all these, said the RBI official cited above. The locally incorporated foreign banks will be subject to the same set of banking norms that domestic banks follow. For instance, 40% of their loans will have to be given to agriculture, small-scale industries and the weaker sections of societythe so-called priority sectorand 25% of their branches need to be located in rural India. Currently, foreign banks need to channel only 32% of loans to the priority sector, which for them also includes loans given to exporters. There is no stipulation on rural branches though RBI is relatively liberal with foreign banks proposals for setting up branches in such areas. Once they choose to take the subsidiary route for Indian operations, foreign banks will be given time to achieve the priority sector lending target.

Their tax liability will also go down from 40% to around 33%. If this is true, it will give us a tremendous play in India. We will be very happy to locally incorporate if there are tangible benefits, said the CEO of a foreign bank who did not want to be named as the policy is not yet in the public domain. A banking consultant, also on condition of anonymity, said: Its all mathematics. Once foreign banks market share in assets is doubled, their growth will depend on how fast the local players are growing. While that is true, historically, foreign banks share of banking assets in India has been around 7-8% and once this goes up to 15%, they will definitely play a larger role in the country. In 2005, RBI released the guidelines on ownership in private banks and acquisition norms for foreign banks. It threw a protective ring around local players for four years by not allowing foreign banks to make acquisitions in India but promised to review its policy after March 2009. RBI could not review the policy in 2009 in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc., the unprecedented credit crunch that the world faced and the dramatic change in risk perception. Globally, the focus is on ring-fencing banks to minimize the damage in case of a collapse and this can be done better when they are locally incorporated, said the RBI official. The 2005 guidelines allowed foreign banks to set up wholly owned subsidiaries to conduct business in India, but did not change the existing branch licensing procedure. No foreign player has taken this route as yet as the norms for the wholly owned subsidiaries were never made public.

In terms of assets, Citibank is the biggest foreign player in India with Rs95,490 crore worth of assets in fiscal 2010, followed by HSBC (Rs90,441 crore) and Standard Chartered (Rs89,545 crore). Their pace of growth has been much slower than local peers. The compound annual growth rate (CAGR) of HSBCs assets in the past five years was 19.27%, Citis 16% and Standard Chartereds 14.27%. In contrast, Axis Bank Ltd, which is double the size of HSBCs India operations, has grown at 29.41%. HDFC Bank Ltd, another Indian private bank with an asset base of Rs2.23 trillion, has grown at a five-year CAGR of 24.78%. Even State Bank of India, the nations largest lender with Rs10.54 trillion of assets, has grown its book at 16.36%, better than Citi and Standard Chartered. However, the growth in off-balance sheet items in foreign banks books such as guarantees, securitized loans, derivatives, among others, have been higher than the domestic banks. While calculating their market share, these exposures, too, will be taken into account. Standard Chartered started its Indian operations by opening its first branch in Kolkata in April 1858, a year after the so-called First War of independence in which the British East India Co.s army rebelled against the colonial rulers. HSBCs origins can be traced back to October 1853, when Mercantile Bank of India, London and China was founded in Mumbai. It was acquired by HSBC in 1959. Citibank is 108 years old. Among other foreign banks, Deutsche Bank AG, 30 years old in India, is present in 12 centres through 13 branches. Barclays Bank Plc, which launched its India operations in November 2006, has seven branches.

UBS AG is one of the latest entrants in Indian banking space. Goldman Sachs and Morgan Stanley are awaiting RBIs nod to enter commercial banking while Nomura is planning to move the regulator for a banking licence. With its economy growing at 8.5%, corporate earnings growing at 20% and more and more consumers buying homes and cars, India is emerging as one of the most lucrative destinations for global banks.

Roadmap for Presence of Foreign Banks in India It may be recalled that the Ministry of Commerce and Industry, Government of India had, on March 5, 2004 revised the existing guidelines on foreign direct investment (FDI) in the banking sector. These guidelines also included investment by non-resident Indians (NRIs) and FIIs in the banking sector. As per the guidelines the aggregate foreign investment from all sources was allowed up to a maximum of 74 per cent of the paid up capital of the bank while the resident Indian holding of the capital was to be at least 26 per cent. It was also provided that foreign banks may operate in India through only one of the three channels, namely (i) branch/es (ii) a Wholly owned Subsidiary or (iii) a subsidiary with an aggregate foreign investment up to a maximum of 74 per cent in a private bank. In consultation with the Government of India, RBI has released the road map for presence of foreign banks in India to operationalise the guidelines. The roadmap is divided into two phases. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. To facilitate this, RBI has also issued detailed guidelines. The guidelines cover, inter alia, the eligibility criteria of the applicant foreign banks such as ownership pattern, financial soundness, supervisory rating and the international ranking. The WOS will have a minimum capital requirement of Rs. 300 crore, i.e., Rs 3 billion and would need to ensure sound corporate governance. The WOS will be treated on par with the existing branches of foreign banks for branch expansion with flexibility to go beyond the existing WTO commitments of 12 branches in a year and preference for branch expansion in under-banked

areas. The Reserve Bank may also prescribe market access and national treatment limitation consistent with WTO as also other appropriate limitations to the operations of WOS, consistent with international practices and the countrys requirements. During this phase, permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. RBI may if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the investee bank, permit such acquisition. Where such acquisition is by a foreign bank having presence in India, a maximum period of six months will be given for conforming to the one form of presence concept. The second phase will commence in April 2009 after a review of the experience gained and after due consultation with all the stakeholders in the banking sector. The review would examine issues concerning extension of national treatment to WOS, dilution of stake and permitting mergers/acquisitions of any private sector banks in India by a foreign bank in the second phase.

RBI roadmap: Foreign banks get to eye private banks

Swiftly taking its cue from Finance Minister P Chidambarams Budget speech, the Reserve Bank of India (RBI) today came out with a flexible roadmap for foreign banks and ownership guidelines for private banks in India. While the much-awaited roadmap promises opening up of the sector, the central bank still retains considerable discretionary powers. While the RBI has provided room for higher levels of shareholding than the prescribed limit in private banks, foreign banks are allowedin two stages to convert their branches into wholly-owned subsidiaries and later list their shares on the stock exchanges with minimum 26 per cent stake with the public.

FOR FOREIGN BANKS

In the first phase (up to 2009), foreign banks already operating in India will be allowed to convert their existing branches to wholly-owned subsidiaries. To allow Indian banks sufficient time to prepare themselves for global competition, entry of foreign banks will initially be permitted only in private sector banks that are identified by RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner, the RBI said. In considering an application made by a foreign bank for acquisition of 5 per cent or more in the private bank, RBI will take into account the standing and

reputation of the foreign bank, globally as well as in India, and the desired level and nature of presence of the foreign bank in India. The RBI may also specify, if necessary, that the investor bank should make a minimum acquisition of 15 per cent or more and may also specify the period of time for such acquisition. The overall limit of 74 per cent will be applicable, it said. In the second phase (after 2009), the subsidiary of foreign banks, on completion of a minimum prescribed period of operation, will be allowed to list and dilute their stake so that at least 26 per cent of the paid up capital of the subsidiary is held by resident Indians at all times consistent with para 1(b) of the Press Note 2 of March 5, 2004. The dilution may be either by way of initial public offer or as an offer for sale. After a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, the RBI said, foreign banks may be permittedsubject to regulatory approvals and such conditions as may be prescribedto enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent.

FOR PRIVATE BANKS

As a prescribed limit, foreign banks and financial institutions (FIs) stake holding in private banks remain capped at 5 per cent while large industrial houses will be allowed to acquire, by way of strategic investment, shares not exceeding 10 per cent of the paid-up capital of the banksubject to RBIs prior approval. The RBI has also said that all private sector banksold or newhave to maintain a minimum net worth of Rs 300 crore. The central bank also made it

mandatory for the banks to provide all information to RBI for approval of appointment of chairman or CEO. However, the RBI allowed a transition arrangement and asked the banks or FIs to submit a time-bound plan for abiding to the final guidelines on ownership and governance in private banks. For maintaining the minimum level of capital, the RBI has asked the banks, which are yet to achieve the norm, to adopt and submit a time-bound plan. Where the net worth declines to a level below Rs 300 crore, it should be restored within a reasonable time, added RBI. The old private banks had earlier been given a three-year time period to increase their capital from Rs 200 crore to the prescribed level. The guidelines are to ensure a diversified ownership and control in private sector banks so as to minimise the risk of misuse of leveraged funds. The RBI has also said that foreign banks, with presence in the country, or FIs should not acquire any fresh stake in a banks equity shares, if by such acquisition, the holding exceeds 5 per cent of the investee banks equity capital.

PROS AND CONS OF FOREIGN BANKS

Entry of foreign bank brings both positive and negative effect on the host country. These are called pros and cons of foreign bank. The pros include better resource allocation, higher competition and efficiency, lower probability of financial crisis, enhanced public confidence in the banking sector, enhanced access to international capital, and development of the underlying bank supervisory and legal framework. On the other hand, the cons of foreign bank penetration include loss of domestic banks market share, instability of the domestic deposit base, credit rationing to small firms, loss of domestic banks profitability, foreign domination and control of the banking system, volatility of domestic financial markets, and worsening of the domestic financial systems ability to respond to large internal and external shocks.

Pros of Foreign Bank Penetration

In the main, the reasons for relaxed restrictions on foreign bank participation in banking systems all over the world are traceable to the pros (i.e. perceived benefits) of foreign bank presence. Several authors have addressed the potential benefits of foreign bank entry for the domestic economy in terms of better resource allocation and higher efficiency. Foreign banks may (i) (ii) Enhance a countrys access to international capital. Serve to stimulate the development of the underlying bank

supervisory and legal framework.

(iii)

Improve the quality and availability of financial services in the

domestic financial market by increasing bank competition, and enabling the application of more modern banking skills and technology. However, foreign banks have to be sizable for there to be any significant transfer of banking technology to the domestic banking sector. Foreign ownership of banks is often thought to improve overall bank soundness, especially when the foreign parent banks belong to well-regulated financial systems that are themselves healthy. Such parent banks are expected to provide greater access to the capital and liquidity that bolster balance sheet strength, and to transfer to local banks the skills and technology that enhance risk management and internal controls. More broadly, foreign bank presence is expected to fortify emerging market financial systems by encouraging higher standards in auditing, accounting and disclosure, credit risk underwriting, and supervision. Foreign banks improve the quality and availability of financial services in the domestic financial market by increasing bank competition, and enabling the application of more modern banking skills and technology. Thus, foreign bank entry has positive welfare implications for all facets of customers of banking and other financial institutions. Banking crises positively correlate with limitations on foreign bank entry into domestic markets. Thus, merely reducing such limitations and easing the ability of foreign banks to enter the domestic banking market reduces the incidence of banking crises, even if foreign banks do not enter. In sum, findings suggest that potential entry of foreign banks proves beneficial on the stability of the domestic banking market. Regarding the link between foreign penetration and financial stability, other things equal, the presence of foreign banks is associated with a lower

probability of financial crisis. If foreign-owned banks forestall liquidity shocks as a result of being better aided by their highly capitalized parents, a country with an internationalized banking sector may be partially isolated from bank runs, irrespectively of the risk-taking behaviour of their foreign-owned institutions. In fact, the presence of foreign banks prevents a bank run in the first place. It is also commonly believed that foreign-owned banks provide stability in times of financial crises. Studies of the Argentina and Mexico crises indicate that in a credit crunch, foreign-owned banks are able to provide credit growth that domestic banks are not able to provide In a similar element, foreign banks may provide higher and more sustained credit flows than their domestic counterparts. However, foreign banks only offer a source of stability if their operations are less sensitive to host-market conditions than the local banking firms. It is also widely believed that the presence of foreign banks helps governments to attract further foreign direct investment inflows. Supporters of foreign bank entry argue that these banks provide an important channel for foreign capital inflows to finance domestic activities. If these foreign funds complement rather than substitute for domestic sources of funds, then a net expansion of available funds that supports higher economic growth reports specific cases in Pakistan, Turkey, and Korea, where foreign banks helped to make foreign capital accessible to fund domestic projects. Foreign bank presence can promote improvements in government regulation and supervision of the financial system due to the unfamiliar business practices that they import into the host country. Domestic regulators would initially find these unfamiliar business practices difficult to evaluate and supervise; however, as time unfolds, new systems and laws would be created to deal

with the new problems arising as a result of the fresh lines of activities and problems within the financial system.

Cons of Foreign Bank Penetration

In the main, the reasons for tightening restriction on foreign bank participation in banking systems all over the world are traceable to the cons (i.e. perceived demerits) of foreign bank presence. Rather unfortunately, several studies have revealed that foreign bank participation has several negative consequences. Notable among them are competitive pressures resulting in significant loss of domestic banks market share and profitability instability of the domestic deposit base especially during times of systemic crises, and the worsening of the domestic financial systems ability to respond to large internal and external shocks. Competitive pressures arising as a result of foreign bank participation in a banking system have negative consequences that are evident in various ways. Firstly, competitive pressures arising as a result of foreign bank participation in a banking system could result in significant loss of domestic banks market share with various accompanied consequences. Gradually and increasingly, international banks have been known to target multinational corporations, foreign agencies and international firms. In doing so, they leverage off the international banking relationships of their parent banks and home country contacts. Under such circumstances, indigenous banks have an uphill task retaining or acquiring the accounts of these multinationals, foreign companies and agencies.

Also, if foreign banks appear more stable than domestic institutions, they may attract the best domestic borrowers (higher-profit and lower-risk borrowers), putting domestic banks in the more precarious position of lending to less credit-worthy borrowers. In this case, indigenous commercial banks are forced to give attention to micro and rural credits. In a cross-country study, it was found that foreign bank entry leads to a decrease in domestic bank profitability, banks non-interest income, and bank overall expenses, but only when entry is measured by the share of foreign banks in the total number of banks rather than their share in the assets of the banking system. Though domestic banks overhead costs are lower in countries with substantial foreign bank presence; domestic banks pretax profitability in high foreign-entry markets is much lower than in markets with low foreign bank presence. From an empirical analysis, also found that increased penetration of foreign banks in the domestic banking system (as measured by the relative importance of foreign banks in either the total number of banks, or total assets, of the banking system) is associated with a reduction in both profitability and overhead costs for domestic banks. However this indicates an improvement in domestic bank efficiency. Foreign bank entry has also been discovered to have a statistically positive impact on the level of loan loss provisioning of domestic banks. This is because foreign bank entry leaves domestic banks to cater for relatively less creditworthy customers, or alternatively foreign bank entry triggers a strengthening of provisioning regulations affecting all banks, thus leading to larger reported provisioning for bad debts by domestic banks It has been argued that entry of foreign banks may not lead to enhanced stability of the domestic banking system, because their presence per se does not

make systemic banking crises less likely to occuras may happen if the economy undergoes a deep and prolonged recession, leading to a massive increase in default rates and an across-the-board increase in nonperforming loans, and because they may have a tendency to cut and run during a crisis. Some observers have argued that the fact that foreign banks may withdraw suddenly after a period of time if they fail to establish profitable operations is also a potential drawback associated with foreign bank entry. However, what is problematic is the context in which a foreign bank is withdrawing (whether it is during a crisis or not), not the fact that it chooses to close its doors because it is unable to make profits (which, in itself, may actually be a desirable outcome). Foreign bank participation, it has been shown, could lead to instability of the domestic deposit base, especially during financial crises. Indeed, during episodes of financial turmoil, it is common to observe a flight to quality that tends to result in a larger concentration of deposits in foreign-owned banks

In practice, countries have very few options to prevent foreign banks from cutting lines of credit to domestic borrowers in a crisis. Where foreign banks do not cut and run during a crisis period, it has been established that they usually reduce their credits within their host-countries. The risk that foreign banks operations may lead to credit rationing to small firms (particularly in the non tradable sector) and greater concentration in the allocation of credit to larger and stronger ones (which are often involved in the production of tradable) is perceived to be high. This is much unlike the domestic banks that are more likely to be patriotic and

sympathetic to the cause of the small firms, especially the indigenous ones. If foreign banks do indeed follow a strategy of concentrating their lending operations only to the most creditworthy corporate (and, to a lesser extent, household) borrowers, their presence will be less likely to contribute to an overall increase in efficiency in the banking sector, in particular, and the financial sector, in general. More importantly, by leading to a higher degree of credit rationing to small firms, they may have an adverse effect on output, employment, and income distribution. Hence, theoretically speaking, an increase in the number of foreign banks in a financial system implies a reduction in the aggregate amount of local micro-firm financing. This could adversely affect the growth and entry of local micro firm.

Rough road ahead for foreign banks setting up units here

The Reserve Bank of India (RBI) is currently seeking feedback on the implications of foreign banks setting up wholly-owned subsidiaries in India. Many large international banks already have an established presence in India. They are well integrated into the domestic system, and compete with domestic banks. Nonetheless, the recent discussion paper falls short of needs and leaves room for a debate. After having unveiled its initial draft road map for foreign banks in 2005, the regulator has issued a number of guidelines . However, in light of the international economic downturn, it has, to date, deferred from making any definitive policy decisions. The latest draft assumes that the global economic growth will continue to be muted and retains its conservative approach in an effort to provide adequate protection to investors. Its stipulations will determine the strategy of the 34 international banks operating in India which, as on March 31, 2010, in aggregate, held around 10.52% of the total assets (including credit equivalent of the off-balance sheet assets ) of all scheduled commercial. In light of the international debate on the "too big, or too connected to fail" issues, it is unsurprising that the RBI has adopted a cautious approach towards setting up subsidiaries. In a buoyant economy, the relationship between bank branch and parent may be of little importance but in adverse conditions, the structure and location of both assets and liability may well become critical. In addition to being more flexible operationally the bank branch structure can increase lending capacity based on parent bank's capital from a corporate governance perspective , it also reduces local dependency as, typically, it facilitates control and support from the regional and head office.

Foreign banks keen to strengthen foothold in India

(Major foreign banks like ANZ of Australia, Credit Suisse and Goldman Sachs are also keen on entering India) Mumbai: Foreign banks have been in India for more than 150 years but more overseas lenders are now queuing up to set up operations, amid signs that tough restrictions on entry may be eased.

Five to eight foreign banks are seeking to come to India, a source familiar with the industry said, with the country viewed as attractive because of gaps in the market and a buoyant economy that has created wealthier clients. India is in focus. It is a high-growth market, added Abizer Diwanji, head of financial services at consultancy KPMG India. Foreign banks are building their base here, focusing on high-net-worth clients. Last week Britains Standard Chartered Bank raised $530 million in a novel share sale through Indian Depository Receipts, which gives Indians an opportunity to get a global exposure to banking. The London-based lender, which as The Chartered Bank opened its first overseas bank in the eastern city of Calcutta in 1858, called the fund-raising issue which was oversubscribed by more than double a homecoming. Australias third-largest bank, ANZ, has been given the go-ahead for retail and wholesale banking operations. Credit Suisse, which already has an Indian investment banking, wealth management and mutual fund arm, is following suit. Embattled bank Goldman Sachs is also keen to enter India.

India is a real market of substance, ANZs chief executive for Asia Pacific, Europe and America, Alex Thorsby, has said. The presence of foreign banks has brought changes to the way India banks. They were instrumental in bringing automated teller machines (ATMs) and credit cards to India. But they have still played a limited role in Indias vast lending space, which has traditionally been dominated by state-run banks, mainly due to restrictions and entry barriers in place until economic liberalisation in the early 1990s. Operations still cater to a niche market of wealthy clients in big cities, offering specialised products, forex and financial transaction facilities, advisory and wealth management services. Thirty-four foreign banks are currently operating in India with Citibank, Standard Chartered and HSBC currently accounting for 70% of their total business. In the last five years to March 2009, foreign banks have seen a net profit compounded annual growth of 27%, led by interest and fee-based income, a report from Mumbai-based HDFC Securities shows. India has concentrated on consolidating its domestic banking system over the last five years but the Reserve Bank of India says the next phase of expansion will see foreign banks role gradually enhanced in a synchronised manner. A spokeswoman declined to comment on how many overseas banks are looking to set up but said they would clear applications as they come in.

The RBI has approved an average 15 bank-branch licences every year for the past few years, which is above its commitment of 12 to the World Trade Organisation. But predictions about when foreign banks will arrive is difficult to assess. One issue that could delay entry is the current trouble in the eurozone, which could affect strategic decision-making. Typically, foreign banks are dependent on the fortunes of their head office, said one banking analyst. Foreign banks could also face stiff competition from Indian lenders, despite the country having a relatively low penetration of financial services, as more private banks have come into the sector in the last decade. Interest margins for banks have been falling since 2000, according to a report by investment bankers and securities firm Execution Noble, as banks fight for market share across the board. In the decade to September 2009, private banks doubled their market share to 20%, while foreign banks slipped from 8% to 6%, said Execution Nobles Aditi Thapliyal

Headcount of foreign banks down over 6% in 2010: RBI

Mumbai: The total headcount of foreign banks in India went down by over 6% in 2010, with as many as 19 out of the 32 overseas lenders operating in the country reporting a dip in their employee strength during the year. According to the Statistical Tables Relating to Banks of India released by the Reserve Bank of India (RBI), the total number of employees of foreign banks operating in India fell from 29,582 in 2009 to 27,742 in 2010, a fall of 6.22%. Among the foreign banks with a major presence in India -- as adjudged on the basis of their employee strength -- only Standard Chartered Bank bucked the trend. Only six foreign banks Hong kong and Shanghai Banking Corporation (HSBC), Royal Bank of Scotland (RBS), Standard Chartered Bank, Citibank, Deutsche Bank and Barclays Bank -- have headcounts of over a thousand employees in the country. Among them, only Standard Chartered witnessed an increase in its headcount last year. It had 7,903 employees in India in 2010, as against 7,825 in 2009. HSBCs employee strength fell to 6,685 in last year from 7,446 in 2009. Similarly, Citibank saw a decline in its headcount to 4,613 employees in 2010 from 4,795 in the previous year.

The headcount of RBS employees in the country went down to 2,716 in 2010 from 3,241 in 2009. The decline was more pronounced in the case of Barclays. Its employee strength in India in 2010 was 1,083, down from 1,534 in the previous year. Germany-headquartered Deutsche Bank also registered a dip in its headcount from 1,599 in 2009 to 1,498 last year. A similar decline was also reported by other foreign lenders operating in India, like Societe Generale, Mizuho Corporate Bank, Credit Agricole and Bank of America. Meanwhile, six other lenders -- State Bank of Mauritius, Oman International Bank, Mashreqbank, Krung Thai Bank, Bank of Ceylon and Bank Internasional Indonesia -- reported no change in their employee strength in India during 2010 vis-a-vis the previous year. Besides Standard Chartered, the other overseas lenders that increased their India headcount in 2010 are UBS AG (to 34 employees in 2010 from 18 in 2009), Mizuho Corporate Bank (to 126 from 113), Development Bank of Singapore (to 417 from 359), Bank of Tokyo-Mitsubishi (to 101 from 95), Bank of Nova Scotia (to 106 from 105) and American Express Banking Corporation (to 870 from 857).

RBI may make it mandatory for foreign banks to adopt WOS (wholly owned subsidiary) route

NEW DELHI: The Reserve Bank is likely to make it mandatory for foreign banks in the country to operate as wholly-owned subsidiaries, in line with the international practice, so that the central bank can have better control over their working. Initially, according to sources, the new banks and the existing ones with a few branches will be asked to convert into wholly-owned subsidiaries (WoS). The larger banks, they said, could be given some more time to adhere to the guidelines that are likely to be announced by June-end. At present, the foreign banks operate through their branches. Under the WOS model, the foreign banks will be required to set up a subsidiary under the Companies Act and operate as an Indian entity. Sources said that in several countries, including the US and Singapore, it is mandatory for banks to operate as WOS. In order to align Indian laws with the international best practices, the RBI had come out in January with the draft guidelines on the mode of operations for foreign banks in India. At present, foreign banks like Citi, Standard Chartered and HSBC operate as branches, mainly in bigger cities, and do not have the freedom to expand like the banks incorporated in India.

In its discussion paper, the RBI has said that it expects large banks to convert them from branches to WOS and that the banks who adopt the subsidiary model would be given preferential treatment for opening of branches. The RBI has further called for making it mandatory for foreign banks with more than 0.25 per cent share in the Indian banking industry to convert themselves from a branch into a WOS. It points out that the government has clarified that a company with a foreign holding of over 50 per cent is a foreign company. At present, there are 37 foreign banks operating in India, with five major banks, including StanChart, HSBC, Citibank and Deutsche, accounting for over 70 per cent of the the total asset size. The discussion paper also said the WOS may be allowed to raise rupee resources through non-equity capital instruments.

How foreign Banks can Enter in India

ENTRY OF FOREIGN BANKS IN INDIA At present there are 320 branches of foreign banks. The entry of foreign banks in India is based on reciprocity, economic and political bilateral relations. These banks finance trade and lend to large business groups. They have also diversified into merchant and retail banking, security operations, deposit mobilization from non-resident Indians and consulting services. It is well-known that foreign banks have helped in making Indian banking system more competitive and efficient. Consequently, the Government came up with a road map for expansion of foreign banks in India. This plan had two phases. During the first phase between March 2005 and March 2009 (ie during the initial stages of roadmap), foreign banks could establish a presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS. Road map For Presence of Foreign Banks in India On 28 February 2005, RBI issued Road map for Presence of Foreign Banks in India containing the guidelines for (i) setting up of WOS by foreign banks; and (ii) conversion of existing branches of foreign banks into WOS. The salient features of the guidelines are discussed herein below: Eligibility of the Parent Bank Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI that they are subject to adequate prudential supervision in their home country. The setting up of a wholly-owned banking subsidiary in India should

have the approval of the home country regulator. Other factors (but not limited to) that will be taken into account while considering the application are: Economic and political relations between India and the country of incorporation of the foreign bank. Financial soundness of the foreign bank. Ownership pattern of the foreign bank. International and home country ranking of the foreign bank. Rating of the foreign bank by international rating agencies. International presence of the foreign bank. Capital The minimum start-up capital requirement for a WOS would be Rs. 3 billion and the WOS shall be required to maintain a capital adequacy ratio of 10 per cent or as prescribed, from the commencement of its operations. It should be noted that the parent foreign bank will continue to hold 100 per cent equity in the Indian subsidiary for a minimum prescribed period of operation. Corporate Governance The composition of the Board of directors should meet the following requirements: Not less than 50 per cent of the directors should be Indian nationals resident in India. Not less than 50 per cent of the Directors should be non-executive directors A minimum of one-third of the directors should be totally independent of the management of the subsidiary in India, its parent or associates. The directors shall conform to the Fit and Proper criteria as laid down in RBIs extant guidelines dated June 25, 2004.

Accounting, Prudential Norms and Other Requirements The WOS will be subject to the licensing requirements and conditions, broadly consistent with those for new private sector banks. It will be treated on par with the existing branches of foreign banks for branch expansion. The banking subsidiary will be governed by the provisions of the Companies Act, 1956; Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; other relevant statutes, directives, prudential regulations and guidelines/instructions issued by RBI from time to time. Conversion of Existing Branches into a WOS All the above requirements prescribed for setting up a WOS will be applicable to existing foreign bank branches converting into a WOS. In addition, they would have to satisfy the following requirements: 1. Supervisory Comfort

Permission for conversion of existing branches of a foreign bank into a WOS will inter alia be guided by the manner in which the affairs of the branches of the bank are conducted, compliance with the statutory and other prudential requirements and the overall supervisory comfort of the RBI. 2. Capital Requirements

The minimum net worth of the WOS on conversion would not be less than Rs. 3 billion and the WOS will be required to maintain a minimum capital adequacy ratio of 10 percent of the risk weighted assets or as may be prescribed from time to time. In this connection, RBIs assessment of the net worth will be final.

India to Audit Foreign Banks Operations Prior to Permitting New Branches

Nov. 6th. 2009 The Reserve Bank of India has confirmed that it will require foreign banks to undergo a full audit of their Indian operations prior to be allowed to establish new branches. India had committed to allowing twelve new branches of foreign banks a year to be opened, however in practice has been far more open. Some 32 foreign banks currently operate in India with some 300 branches between them. Under Indias WTO agreements, the country has the right to exclude licenses from banks once their share in the banking system exceeds 15 percent. This threshold was passed some time ago. The requirement to audit foreign banks before further expansion is to preserve risk management capabilities over concerns that any failures could create risks for Indian financial markets. India is also pushing for its domestic banks to have greater access in international markets and says that the issuance of further main banking licenses to foreign banks in India will depend on reciprocity. The move to audit foreign banks expansion in India is seen as a sensible precaution in light of the current global crisis.

Proposed Framework for Presence of foreign banks in India

There are currently 37 foreign banks operating in India as branches. Their balance sheet assets, accounted for about 7.65 percent of the total assets of the scheduled commercial banks as on March 31, 2010 as against 9.03 per cent as on March 31, 2009. In case, the credit equivalent of off balance sheet assets are included, the share of foreign banks was 10.52 per cent of the total assets of the scheduled commercial banks as on March 31, 2010, out of this, the share of top five foreign banks alone was 7.12 per cent. The policy on presence of foreign banks in India has followed two cardinal principles of (i) Reciprocity and (ii) Single Mode of Presence. These principles are independent of the form of presence of foreign banks. Therefore, these principles should continue to guide the framework of the future policy on presence of foreign banks in India. Following factors seem relevant for any framework for future policy on presence of foreign banks in India:

Prima facie the branch mode of presence of foreign banks in India provides a ring-fenced structure as there is a requirement of locally assigned capital and capital adequacy requirement as per Basel Standards. Certain provisions of the BR Act1 also delineate the separate legal identity of branches of foreign banks in India. Further, under section 584 of the Companies Act, though the company incorporated outside India is dissolved, if it has ceased to carry on the business in India, it may be wound up as an unregistered company. However, except for the assets specifically ring-fenced under Section 11(4) of the BR Act, the claim of

domestic depositors and creditors over other assets is yet to be legally tested.

Keeping the above in view, on balance, the subsidiary model has clear advantages over the branch model despite certain downside risks. However, under the extant policy as laid down in 2005 Roadmap, no foreign bank has approached RBI, for setting up a subsidiary, may be due to lack of incentives. Hence there may be a need to incentivise subsidiary form of presence of foreign banks.

From financial stability perspective there would be a need to mandate at entry level itself subsidiary form of presence (i.e. wholly owned subsidiary-WOS) under certain conditions and thresholds. It would likewise be mandatory for those fresh entrants who establish as branches to convert to WOS once they meet the conditions and thresholds referred to above or which become systemically important over a period by virtue of their balance sheet size.

While deciding the approach towards conversion of existing foreign bank branches, Indias commitments to WTO will have to be kept in mind.

It may not, therefore, be possible to mandate conversion of existing branches into subsidiaries. However, the regulatory expectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants or which become systemically important by virtue of their balance sheet size would voluntarily opt for converting their branches into WOS in view of the incentives proposed to be made available to WOS.

The branch expansion of both the existing foreign banks and the new entrants present in the branch mode would be subject to the WTO commitments.

Measures to contain dominance of foreign banks

There is a downside risk to financial stability of the dominance of foreign banks over the domestic banking system on account of the near-national treatment proposed in several respects to WOSs. Therefore, in order to ensure that such a situation does not come about, certain restrictive measures would have to be put in place. At present under the WTO commitments, there is a limit that when the assets (on balance sheet as well as off-balance sheet) of the foreign bank branches in India exceed 15% of the assets of the banking system, licenses may be denied to new foreign banks. Building on this to address the issue of market dominance, it is proposed that when the capital and reserves of the foreign banks in India including WOS and branches exceed 25% of the capital of the banking system, restrictions would be placed on (i) further entry of new foreign banks, (ii) branch expansion in Tier I and Tier II centres of WOS and (iii) capital infusion into the WOS this will require RBIs prior approval.

CONCLUSION
Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after few years.

Bibliography

www.rbi.org.in www.indiastat.com www.livemint.com www.gooogle.com