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June, 16th 2010

Overseas lenders want more branches in exchange for local incorporation in line with RBI road map.

Foreign banks operating in India are not keen on local incorporation unless the countrys central bank treats them on par with domestic lenders in terms of branch expansion.

The foreign banks also fear that if they become wholly owned subsidiaries of the overseas parents, the Reserve Bank of India (RBI) may want them to list on local bourses.

The Indian Banks Association (IBA) and the foreign banks are planning to raise these concerns with RBI.

The central bank in its annual policy review in April had said it would prepare a discussion paper on the mode of presence of foreign banks through branches or the subsidiary route by September and asked for feedback from foreign banks.

IBA had its first meeting with the foreign banks on this matter last week.

Under World Trade Organization (WTO) norms, RBI is committed to 12 new branch licences to foreign banks every year. Though it gives more than 12, foreign banks are not happy as RBI is more liberal with domestic banks when it comes to branch expansion.

Till last year, 31 foreign banks in India with 295 branches accounted for 0.36% of the total branch network, even though their shares in banking assets was 8.53%.

RBI in February 2005 had laid down the first phase of a road map for foreign banks operating in India, offering them two optionsbranch presence or adoption of the wholly owned subsidiary model. None of the banks has yet opted for local incorporation.

RBI was to review the road map in 2009, but the unprecedented global credit crunch that followed the collapse of US?investment bank Lehman Brothers Holdings Inc. in September 2008 forced it to defer the review.

The 2005 guidelines prescribed a capital requirement of Rs300 crore for local incorporation. The capital requirement for a foreign bank to open a branch in India is $25 million (around Rs117 crore).

We have had just one meeting so far. The draft will be ready by the end of June. Individual banks will also send their responses, said a senior IBA official who declined to be named as he is not authorized to speak with the media. The main issues relate to equal treatment when it comes to branch expansion. They also want clarity on whether listing would be mandatory and whether they would have to meet 40% priority sector requirement and also support government-sponsored sche-mes.

Domestic banks have to ensure that 40% of their credit is to the so-called priority sector consisting of agriculture and small businesses.

For foreign banks, this number is pegged at 32%. Export loans are part of priority sector loans for foreign banks.

In the current form, we see no incentive in converting ourselves into a subsidiary unless RBI is willing to treat us on a par with domestic banks when it comes to branch expansion, said the chief executive officer of a foreign bank. He did not want to be quoted as it involves the regulator. There would be tax implications for the banks as well when we transfer the assets from the branch to the subsidiary. We would also seek clarity on the prescribed capital level.

Bobby Parikh, managing partner of consultancy BMR and Associates, said though the 2005 guidelines provide foreign banks with the option to adopt the subsidiary route, none have opted for it as there is no great benefit.

Conversion into a subsidiary does not give them advantage in terms of opening of more branches. This restriction has been constraining their growth and is the biggest issue in their day-to-day operation, he said.

The other point of contention, Parikh said, is RBIs insistence that these entities should list locally over a period of time.

Standard Chartered Plc listed its Indian depository receipts (IDRs) last week, the first foreign entity to do so, but it has not caught investors fancy yet, and other foreign banks are not excited about listing in India.

The IDRs rose 1.43% to close at Rs103 on the Bombay Stock Exchange on Tuesday, but are still trading below the issue price of Rs105.

Citibank NA is the largest foreign bank in India by assets, followed by Standard Chartered and Hongkong and Shanghai Banking Corp. Ltd.

We fear we would have to list in the country, which none of the banks want because its too much of a commitment for a subsidiary in terms of capital and managing a new set of shareholders, the chief operating officer of a foreign bank said on condition of anonymity.

Naresh Makhijani, executive director of consultancy firm KPMG, said foreign banks should be allowed to open more branches and have a national footprint, which will allow them to ensure economies of scale. According to him, there will not be any change in their tax obligation if they convert their branches into a subsidiary.

RBI is keen on local incorporation as it wants to ring-fence foreign banks India play from their global operations. The foreign parent can take the money outif their global balancesheet needs itfrom an Indian branch, but cannot do so when the branch becomes an Indian subsidiary.

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