* Central bank move is part of response to financial crisis
* Says local units of banks would gain from being subsids
* Banks would face demands such as "priority sector" lending
* StanChart, HSBC among those seen mulling change
By Subhadip Sircar and Sumeet Chatterjee
MUMBAI, Nov 7 India's move to encourage foreign
banks such as Citigroup and HSBC Holdings to
reposition as wholly-owned subsidiaries may find just a handful
of takers, given the regulatory trade-off.
Under central bank rules announced late on Wednesday,
foreign banks which convert their local operations from a branch
structure to being subsidiaries will be treated on nearly equal
terms with local lenders.
This could open the way to them opening more outlets across
India and could also allow them to buy local private sector
banks - potentially a major lure as banks seek to tap into the
fast-growing Indian economy.
The rules are aimed at giving India greater regulatory power
over foreign banks in the wake of the global financial crisis.
Yet foreign banks would also face a bigger regulatory burden
in the subsidiary setup, including having to earmark 40 percent
of their lending to the "priority sector," which includes
underserved parts of the economy and agriculture.
That's a requirement that domestic banks must already meet
and is being phased in for foreign banks with 20 or more
branches. As a subsidiary, a foreign bank would also need
approval to tap its parent's balance sheet, something it doesn't
need under existing rules.
The new rules come as global financial firms have been
paring back their investment in non-core markets.
"The environment has changed, both in India and overseas.
Only a handful of banks who have retail banking ambitions will
consider it," said a senior banker with a large U.S. bank,
declining to be named given the sensitivity of the matter.
The 43 foreign banks in India account for less than half a
percent of the country's 92,114 banking outlets. Under exiting
rules, foreign banks can open up to just 12 branches between
them per year in India.
Citigroup, HSBC and Standard Chartered
are the biggest and operate as branches, not
subsidiaries. They along with Singapore-based DBS Group Holdings
Ltd, which has 12 branches, are widely seen as the
likeliest to consider switching to subsidiaries.
"If you look at Citi, StanC or HSBC, they have an embedded
India strategy, so it makes a lot of sense for them to convert
because they are getting near-national treatment," said Abizer
Diwaji, national leader for financial services at EY India.
"The flip side is that they will have to commit (more)
capital in India."
DBS India CEO Sanjiv Bhasin said the bank was evaluating the
RBI guidelines. "If you read it, it looks intimidating, but the
fact is you have been given five years," Bhasin said, referring
to the priority sector lending target. "It's difficult but it's
Citigroup and HSBC declined comment. StanChart welcomed the
guidelines but said it was too early to comment in detail.
In recent years, Barclays has exited retail banking
in India and Royal Bank of Scotland has sold its Indian
credit cards, mortgage and commercial banking portfolios, part
of a broader trend by global banks looking to shore up their
capital base to meet regulatory requirements.
"Most of the foreign banks in India have moved away from
retail banking and are now focusing on corporate banking," said
the India operations head of a European bank who declined to be
Under the new rules for wholly-owned subsidiaries, foreign
banks can buy a local private-sector lender after a central bank
review of overall foreign bank penetration.
To prevent foreign domination of the banking sector, the
central bank will restrict further entry of new wholly owned
subsidiaries of foreign banks if the assets of institutions
owned abroad exceed 20 percent of the country's total.
Currently, foreign banks' capital, reserves and surplus
account for 15 percent of the overall banking sector, even
though foreign banks have less than 5 percent of industry
deposits, leaving little room for big acquisitions.
India's banking system is dominated by state banks, which
accounted for more than two-thirds of industry assets at the end
of March 2012, the latest RBI data showed.
Foreign banks operating in India before August 2010 have the
option of continuing as branches. "However, they will be
incentivised to convert into WOS (wholly owned subsidiaries)
because of the attractiveness of the near-national treatment
afforded to WOS," the central bank said.