RBI releases policy framework for foreign banks in India

RBI has released the policy framework for foreign banks in India. The policy framework is primarily built upon two cardinal principles of reciprocity and single mode of presence. Currently foreign banks in India are present only through branch mode. RBI has inventivised foreign banks to set up a WOS, by allowing them a near national treatment in branch opening (which was constrained earlier). We need some more clarility on the reciprocity aspect (which is one of the cardinal principle behind these guidelines), barring which we believe that foreign banks would be more than willing to enter/expand in India. Moreover the frameworks also specifies that RBI may allow foreign banks to buy Pvt. banks after it makes a review of functioning of foreign banks and foreign investment in Indian banks, but it should not exceed overall FDI limit of 74% in any private bank. This is a positive development for Private Banks in general (both old and new), as it increase their likelihood of being a M&A candidate. We upgrade South Indian Bank, Federal Bank and Yes Bank to Buy. 

Salient highlights of the framework are as follows

 Conditions which necessitates WOS form of presence: Foreign banks which fulfill any of the following conditions i) has complex structures, ii) which do not provide adequate disclosure in their home jurisdiction, iii) which are not widely held, iv) which belong to a jurisdictions where preferential claim to depositors of home country is given in a winding up proceedings, v) if that bank becomes systematically important by having assets more than 0.25% of Indian banking system asset’s, would be mandated entry into India only in the WOS mode or would have to convert its presence from branch mode to a WOS mode. Foreign banks in whose case the above conditions do not apply can opt for a branch or WOS form of Indian presence.

 No restrictions on branch expansion: WOSs would be given a near national treatment, just as any other locally incorporated bank. WOSs would be able to open branches anywhere in the country at par with Indian banks, except in certain sensitive areas where RBI’s prior approval would be required. 

 Safeguards to prevent domination by foreign banks: To provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, the framework specifies that in case the capital and reserves of the foreign banks (i.e. WOSs and foreign bank branches) in India exceed 20% of the capital and reserves of the banking system, restrictions would be placed on further entry of new WOSs of foreign banks and capital infusion into the existing WOSs of foreign banks. As regards foreign banks in branch mode of presence, as per the WTO commitments licences for new foreign banks may be denied when the assets in India (both on and off balance sheet) of foreign banks’ branches exceeds 15% of total assets of Indian banking system 

 Minimum paid up capital to be `500cr: The initial minimum paid-up voting equity capital for a WOS shall be `500cr for new entrants. Existing branches of foreign banks desiring to convert into WOS shall have a minimum net worth of ` 500cr. 

 Corporate Governance requirements: As regards corporate governance is concerned, framework states that for WOSs (i) not less than two-third of the directors should be non-executive directors; (ii) a minimum of one-third of the directors should be independent directors and (iii) a minimum 50% of the directors should be Indian nationals /NRIs/PIOs subject to the condition that not less than one-third of the directors are Indian nationals resident in India. 

 PSL requirement would be 40%: Just like any other domestic scheduled banks, PSL requirement for WOSs would be 40%, with 5 year transition period (which would end on March 31, 2018) for existing foreign bank branches converting into WOS. 

 Option for diluting stake exists, but in that case listing required: WOSs may, at their option, dilute their stake to 74% or less in accordance with the existing FDI policy. In the event of dilution, they will have to list themselves. 

 M&A permitted subject to RBI’s review of functioning of foreign banks and foreign investment in Indian Banks: In its policy framework, RBI says it may allow foreign banks to buy Pvt. banks after it makes a review of functioning of foreign banks and foreign investment in Indian banks, but it should not exceed overall FDI limit of 74% in any private bank.