India will “gently increase” the pressure on foreign banks to set up local subsidiaries, as it seeks to improve its regulatory oversight of their operations in the country, Reserve Bank of India (RBI) Governor Raghuram Rajan said.
“Going forward the pressure will gently increase on them, certainly the large ones, to move to subsidiary,” Rajan said in an interview in his office in Mumbai on Tuesday. “There is still a remaining small dialogue we are having with them about what they should put in the subsidiary, but I think broadly we are working toward subsidiarization sooner rather than later.”
Since the Indian central bank announced the rules under which foreign banks can set up local subsidiaries two years ago, Singapore’s DBS Group Holdings Ltd is the only sizable foreign bank to have taken steps to set up a local unit. The four largest foreign banks in the country — Citigroup Inc, Standard Chartered PLC, HSBC Holdings PLC and Deutsche Bank AG — have yet to apply.
The banks have been reluctant to create subsidiaries because of the extra capital they will need to set aside, as well as higher compliance costs, Mumbai-based Prabhudas Lilladher Ltd banking analyst Nitin Kumar said.
When it announced the rules, the RBI said the separate legal entities will give it greater control over the local operations of the foreign banks, which would be required to have their own capital and a local board of directors. The move would ensure a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent, thereby protecting Indian retail depositors, according to the RBI’s November 2013 statement.
Establishing a local unit in India would give the foreign banks the same freedom as the local banks to open more branches. At the moment, they can only open a combined 12 new branches a year.
Standard Chartered is the largest foreign bank in India by branches, with 100 operational outlets. HSBC has 50, while Citigroup has 45.
DBS, Southeast Asia’s largest lender by assets, expects to complete the conversion of its India business into a subsidiary by the end of March next year, DBS chief executive officer Piyush Gupta said in May.
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