The global crisis that rocked the financial world in September 2008 has forced regulators and governments to reset policy frameworks to incorporate the lessons learnt. The Reserve Bank of India, which has won accolades for its conservative approach thereby ensuring that the Indian banking system got away virtually unscathed in the aftermath of the financial meltdown, continues to remain prudent. Indeed, the central bank now wants to make sure that foreign banks operate as subsidiaries so that risks are ring-fenced. Moreover, the RBI would also like to see that financial groups that operate across businesses, are structured such that the non-banking business segments do not pose a risk to the core banking business. The RBI has meanwhile issued a discussion paper on permitting the entry of new banks in the private sector, largely to push the financial inclusion agenda. However, it is making sure that tougher norms are in place before industrial groups are allowed entry.
The central bank has constituted an internal working group, headed by deputy governor Shyamala Gopinath, to review the road map for the introduction of a bank holding company structure. The group is expected to make the financial holding company or FHC structure mandatory for new entrants to the banking space. An FHC will typically have a bank, an insurance company and an asset management company operating under it.
The RBI also believes foreign banks in India should convert themselves into wholly-owned subsidiaries to enable it to have better regulatory control over these entities and ring fence risks. In return, the central bank may offer the foreign banks more branch licences though it is expected to ask them to list on the Indian bourses at some point. Foreign banks have welcomed the RBI step cautiously, seeking clarity from the RBI on national treatment, tax implications and whether dilution would be compulsory.
Sanjiv Bhasin, GM and CEO, DBS India, says his bank is keen to operate as a subsidiary in the country. “Subsidiarisation would help the country as banks would bring in newer products and improve the penetration of financial products in the market,” he observes.
Adds Neeraj Swaroop, CEO, Standard Chartered Bank India, “Subsidiarisation will increase competition, which would be beneficial to customers. Additionally, foreign banks have the ability to access global capital, which is also good for the economy.”
Bobby Parikh, partner, BMR & Associates, believes the structural changes that RBI is considering would