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Foreign banks brace for India regulatory shake-up that will force them to set up separately capitalised local subsidiaries

Last updated: August 12, 2013 5:48 pm

Foreign banks brace for India regulatory shake-up

By James Crabtree in Mumbai

Standard CharteredCitigroup and HSBC – the three largest foreign banks operating in India – are bracing themselves for a regulatory shake-up in the country that will, in effect, force them to set up separately capitalised local subsidiaries. The Reserve Bank of India’s new policy on overseas banks is “imminent”, and will potentially be unveiled as soon as this week, according to people familiar with the situation. Foreign banks control about 5 per cent of the assets in India’s banking sector, but face numerous regulatory restrictions, including strict limits on the number of branches they are permitted to open.The central bank’s new policy is likely to offer foreign banks the chance to open more local branches – something they have long sought – but at the cost of an expensive reorganisation of their governance and capital structure.

“In the last 20 or 30 years, this is the most significant change they will have gone through,” said Ravi Trivedi, a consultant and former head of banking at KPMG India. “It is a deep structural change that forces them to cut their umbilical cords to their mother ships and be regulated in a completely different way.”

Standard Chartered, HSBC and Citi all declined to comment.

The regulations follow a difficult period for foreign banks in India. Many have struggled to win a greater share of a banking system that held Rs82tn ($1.3tn) in assets in 2012, and which many analysts predict will become the world’s third largest by assets over the next two decades.

Goldman SachsMorgan Stanley and UBS have alldropped plans to secure full banking licences in the country over the past 12 months, while Barclays and Royal Bank of Scotland have shut down their retail operations in recent years.

The RBI’s policy making has also come under heightened scrutiny following the appointment of new governor Raghuram Rajan, the former International Monetary Fund chief economist, who takes up his position next month.

Those familiar with the new policy said the RBI would not force existing foreign banks to set up subsidiaries. However, analysts argued that the three largest institutions are likely to have little option but to take that course.

Over the next five years StanChart, Citi and HSBC also face onerous new regulations requiring them to lend more to farmers and poorer communities, which they are unlikely to be able to meet without agreeing to set up subsidiaries and gain clearance for more branches.

“The bigger banks are going to struggle to do what they have to do, in terms of massive priority sector lending, if they don’t go down this path,” says Saurabh Tripathi, a partner at the Boston Consulting Group in Mumbai.

“This process has been a long time coming now, but I also wouldn’t be surprised if it now happens quite quickly, given the policy also has a welcome byproduct in the form of getting some foreign direct investment into the country, at a time when India needs it.”

The RBI’s push for subsidiarisation was originally conceived in the aftermath of the global financial crisis as a means to protect India’s financial system from blow-ups in distant global banks. A draft policy paper on the issue was published in 2011.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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