India to Issue New Rules for Foreign Banks; Restrictions on Branch Openings Will Be Reduced If Lenders Set Up Local Units, Lend More in Rural Areas

India to Issue New Rules for Foreign Banks

Restrictions on Branch Openings Will Be Reduced If Lenders Set Up Local Units, Lend More in Rural Areas

NUPUR ACHARYA

Oct. 27, 2013 10:44 a.m. ET

MUMBAI—Indian regulators are expected to issue new rules governing the operation of foreign banks in coming days, in a step aimed at pressing them to set up local subsidiaries and lend more in poor, rural areas. More than 40 international banks now do business in India with significant government-imposed restrictions on the number of branches they can open each year and how they can raise funds.Bankers said they expect the new regulations to ease such limits for banks that decide to incorporate in India, though taking that step could subject them to other obligations, such as expanding lending to low-income customers.

“The process of conversion from a branch into a wholly owned subsidiary has several implications,” said Abhijit Sen, chief financial officer of Citibank India. He said the details of the new rules must be weighed before any decision.

The new regulations are expected to hew to a 2011 proposal by India’s central bank that any new foreign banks coming to India be required to set up a local subsidiary. Banks already operating in the country would be given a choice.

Bankers said the Reserve Bank of India’s preference is that the lenders already in India—which include the U.K.’s Standard Chartered STAN.LN +0.30% PLC and HSBC Holdings HSBA.LN -0.32% PLC in addition toCitigroup

Inc. C -0.18% ‘s Citibank—choose the local option.

Raghuram Rajan, governor of the Reserve Bank, said at an event in Washington this month that foreign banks which choose to convert to local units will be given “near-national treatment.”

He also said they could potentially buy other Indian banks.

But if the global banks operate local units, they will be required to follow some stringent lending rules that could dent profitability. Locally incorporated banks, for instance, are required to open 25% of new branches in rural areas where there are too few banks. It can take a long time for branches to make money in those areas.

Local subsidiaries of global banks would also likely have to give 40% of their total loans to borrowers designated as priorities by the government, such as agricultural workers and the poor. These borrowers typically don’t have any credit history, so the risk of lending to them is higher.

Large foreign banks—those with more than 20 branches, including Standard Chartered, HSBC and Citi—were already asked starting last year to raise the amount of priority-sector loans they make to 40% from 32% previously. They were given five years to hit the 40% figure.

“It is a challenge given that we are only given a couple of branches a year,” said a senior foreign banker. “If we don’t have the branch network, how can we reach the rural areas while sitting in a city branch?”

Under a World Trade Organization agreement, the Reserve Bank is mandated to allow a total of just 12 new branches to foreign banks each year. That figure is exceeded in some years, but not by much.

To win foreign banks’ approval, the central bank will likely need to assure them that they won’t face hefty taxes for going local, said Shinjini Kumar, executive director with Mumbai-based advisory firm PricewaterhouseCoopers India.

Some foreign banks are lobbying the Reserve Bank to give them niche banking licenses, say to operate as only a foreign-exchange bank or as a wholesale bank, because they don’t want to do retail banking.

Mr. Rajan has said the RBI is considering issuing differentiated licenses.

India set to issue new rules for foreign banks

MUMBAI — Indian regulators are expected to issue new rules governing the operation of foreign banks in the coming days, in a move aimed at pressing them to set up local subsidiaries and lend more in poor rural areas.

4 HOURS 44 MIN AGO

MUMBAI — Indian regulators are expected to issue new rules governing the operation of foreign banks in the coming days, in a move aimed at pressing them to set up local subsidiaries and lend more in poor rural areas.

More than 40 international banks currently do business in the country, with significant government-imposed restrictions on the number of branches they can open each year and how they can raise funds.

Bankers said they expect the new regulations to ease such limits for banks that decide to set up in India, though taking that step could subject them to other obligations, such as expanding lending to low-income customers.

“The process of conversion from a branch into a wholly owned subsidiary has several implications,” said Citibank India Chief Financial Officer Abhijit Sen. He said the details of the new rules must be weighed before any decision.

The new rules are expected to conform to a 2011 proposal by the central bank that any new foreign banks coming to India be required to set up a local subsidiary. Those already operating there would be given a choice.

Bankers said the Reserve Bank of India prefers that the lenders already in India — which include the United Kingdom’s Standard Chartered and HSBC Holdings, in addition to Citibank — choose the local option.

Mr Raghuram Rajan, Governor of the Reserve Bank, said at an event in Washington this month that foreign banks which choose to convert to local units will be given “near-national treatment”. He also said they could potentially buy other Indian banks.

But if the global banks operate local units, they will be required to follow some stringent lending rules that could dent profitability. Locally incorporated banks, for instance, are required to open 25 per cent of new branches in rural areas where there are too few banks. It can take a long time for branches to make money in those areas.

Local subsidiaries of global banks would also likely have to give 40 per cent of their total loans to borrowers designated as priorities by the government, such as agricultural workers and the poor. These borrowers typically do not have any credit history, so the risk of lending to them is higher.

Large foreign banks — those with more than 20 branches, including Standard Chartered, HSBC and Citi — were already asked starting last year to raise the amount of priority-sector loans they make to 40 per cent from 32 per cent previously. They were given five years to hit the 40 per cent figure.

“It is a challenge, given that we are only given a couple of branches a year,” said a senior foreign banker. “If we don’t have the branch network, how can we reach the rural areas while sitting in a city branch?”

Under a World Trade Organization agreement, the Reserve Bank is mandated to allow a total of only 12 new branches to foreign banks each year. That figure is exceeded in some years, but not by much.

To win foreign banks’ approval, the central bank will likely need to assure them that they would not face hefty taxes for going local, said Mr Shinjini Kumar, Executive Director with Mumbai-based advisory firm PricewaterhouseCoopers India. Dow Jones