After having established firmly that the benefits of having foreign banks in India outweighs the disadvantages, we advocate

the entry of players like Citibank, Deutsche bank, JPMC and Goldman Sachs in the Indian banking sector. Next up, we address the question- How should foreign banks come to India? What framework must FBs employ to be successful in India? In 2005, the Reserve Bank of India released the Roadmap for presence of Foreign Banks in India laying out a two track and gradualist path aimed at increasing the efficiency and stability of banks in India. One track was the consolidation of the domestic banking system, both in private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronised manner. The Initial Plan The Road map was divided into 2 phases- phase 1 from March 2005-09 and phase 2 which began immediately after phase 1. The first phase comprised of setting up of wholly owned subsidiaries (WOS) of FBs or conversion of branches to WOS. The guidelines covered, inter alia, the eligibility criteria of the applicant foreign banks such as ownership pattern, financial soundness, supervisory rating and the international ranking. The WOS was to have a minimum capital requirement of Rs.300 crore i.e. Rs.3 billion and would need to ensure sound corporate governance. The latter phase was supposed to be an extension of insights from Phase 1 to be undertaken after its review. However, at the time of review, the world was reeling under financial crisis and there were uncertainties about the stability of the Indian financial system. At that time it was considered advisable to continue with the current policy and procedures governing the presence of foreign banks in India. The Way forward RBI Governor on April 20, 2010, in his Annual Policy Statement for 2010-2011 indicated that while there have been continuous improvements in the global financial markets, all international bodies have been trying to come up with international norms aimed at maintaining financial stability. Assimilating the learnings from global experience and some of the best international practices, the central bank presented a discussion paper on the form of presence of foreign banks in India.

Branches vs. Subsidiaries

Covered above are the salient features of Branches and Wholly owned subsidiaries along with some merits and demerits. The major demerit of branches is Cross-border resolution issue. Different countries deal differently with insolvency issue. Here a bank may chose to operate as a separate -entity wherein home country depositors or creditors are given preference over claimants from branches located overseas or a single -entity doctrine which gives equal importance to local and foreign creditors. Some of these issues have been addressed by policies set by CBRG. Still in light of them, countries prefer Local incorporation or setting up of subsidiaries advantages of which have been mentioned. However, a number of examples of Argentine or Malaysian crisis indicate how WOS don not enjoy continued support of parent banks in times of trouble. On balance however weighing the pros and cons of the branch form of presence against the subsidiary form of foreign banks, the advantages in WOS outweigh downside risks. In the light of experience gained, particularly, in the recent global crisis, subsidiary form of presence appears to be a preferred mode for the presence of foreign banks.

Proposed framework for presence of FBs in India Primarily in India we prefer the WOS structure as well. However the FBs are subject to a number of rules and regulations set by RBI and WTO commitments. Some of the norms are as follows: Check for Parent bank eligibility- with respect to its performance, financial stability, ownership pattern, its credit rating, relation between parent bank country and India etc. Entry norms as set by RBI Capital requirement norms and how to raise equity capital locally- for such issues same rules apply as those for new private banks Corporate Governance standards must be maintained by BOD and independent directors who are accountable for upholding the ethical standards of banking Accounting, prudential and other norms to be followed as per some of the Indian laws like Companies Act, 1956, Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, other relevant statutes and the directives Expansion of branches, tax, dividend treatment similar to new private banks in India Priority sector lending requirements such as
Sr.No. Particulars 1. Target

Total Priority Sector 40% of Adjusted Net Bank Credit Lending target (ANBC) or credit equivalent amount of off-balance sheet exposure whichever is higher

2.

Sub-target Export credit

for 12% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure whichever is higher

3.

Sub-target agricultural advances

for 10% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure whichever is higher [Not more than 25% of above 10% i.e. 2.5% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of

off-balance sheet exposure whichever is higher should relate to indirect agriculture advances] 4. Small advances enterprise 10% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of off-balance sheet exposure whichever is higher

Apart from the above mentioned framework, constant attempts are being made by RBI to revise the rules and regulations. Hopefully, in an year or two we will have a new improved set of regulations.