Fitch Ratings on Friday said the Reserve Bank of India?s (RBI) steps to incentivise foreign banks to set up wholly owned subsidiaries (WoS) is unlikely to alter the banking sector?s competitive landscape by itself. However, the guidelines signal the prospects of further reforms, the agency said in a note.
The note said, in theory RBI?s moves should encourage existing large foreign banks to deepen their profiles in India, but will also create challenges for these banks. ?Regulatory treatment which is almost equivalent to that for domestic banks, will also create formidable challenges such as meeting priority sector lending norms (40% net bank credit) and maintaining at least 25% of all new branches in unbanked centres,? the note said.
The note said foreign banks that move to the (WOS) model will compete in business areas that are not traditionally their strength, such as agribusiness that has a sub-limit of 18% under new norms.
?Foreign banks with 20 or more branches are anyway obliged to comply with the broad and sub-targets under priority sector lending, and have until FY18 to do so. However, their ability to achieve this remains largely untested, as even Indian banks find it hard at times to meet these targets on a consistent basis.?
Fitch argued that foreign banks that opt for the WOS model would face growth issues with limited capital headroom. This is because their net worth stands at 15% of the system?s total capital and reserves, and not too far below the 20% limit under the new regulation, the note said.
