RBI paper on foreign banks: A tricky job

Posted on February 2, 2011 | Author: Shinjini Kumar PwC Director, Tax & Regulatory Services | View 840

The preparation of the discussion paper that RBI put out for feedback last week could not have been an easy task, given the multiple dimensions of the issue and the complexity introduced by historical factors. Although foreign banks in India have existed within the branch mode of presence, they cannot be called a unified ‘sector’, with little being common between them, except their overall goal of high profitability and their attraction as preferred employers for the elite of India. 
In this scenario, what do the indicative signposts in the discussion paper hold for foreign banks? To RBI’s credit, they have recognised the diversity and tried to arrive at a fine balance between international protocol compulsions, financial stability priorities and national interest issues. They have not tried to create a straitjacketed entry route, which had the potential to pose serious existential dilemmas for some of the existing players as well as the potential applicants for bank licences.
Instead, the paper moves from dropping broad hints to existing ‘eligible’ banks to keeping almost complete autonomy on determination of conversion parameters such as ‘complex structures’ (how complex is complex?) or ‘inadequate market discipline’ in the country of incorporation. 
The paper, then, will mean different things to different banks. To large foreign banks that fit in within the eligibility norms, most of which are specific enough to be non-negotiable, there may not be much choice despite the indulgent language of ‘expectation’, ‘voluntary’ conversion and ‘incentives proposed to be made available to WOS’. 
To the small niche banks which primarily build their business model around the requirements of their home country businesses, or are essentially in the country to lend support to their investment banking arms, the discussion paper could hold many interesting possibilities from a regulatory and supervisory perspective. They will most likely not have enough incentives to convert to a WOS.
Nor will they have the compulsion to do so if they do not consider themselves to fall within the criteria. Interestingly, this seems to be a self-selection issue. Whereas for new entrants, RBI’s discretion on the somewhat subjective conversion parameters would prevail, for the existing entrants, it seems to be left to the banks.
Such banks will obviously be a long way away from hitting the quantitative benchmark for mandatory conversion and can reasonably be assumed to make a choice in favour of the branch mode of presence. If this constrains their ability to expand physical outreach, so be it. But would the dual mode of presence solve their problems with the ‘one size fits all’ model of supervision? 
The medium-sized foreign banks will be faced with a more interesting dilemma. In the past, they have had their share of struggle with getting branch licences, and the restriction on business expansion in such cases has not been as voluntary as driven by regulatory constraints.
That straight and narrow road to limited business model now forks into two directions — choose to incorporate locally and grow within the uncertain promise of ‘national treatment’ or continue as before with certain knowledge that no more branches may be forthcoming.
Both options would need to be carefully evaluated as they would involve significant commitment on one side and the risk of missing out of the India story on the other. There are bound to be some divergent views in the boardrooms of these banks and their parents offshore. 
Another set of keen stakeholders in this discussion is the foreign banks that are either in the middle of their application process or currently evaluating their options for global expansion, having little choice on the globe except China and India, both with their unique regulatory challenges. To this group, the paper should be a very welcome step forward from the uncertainty that has dominated their strategy discussions.
The roadmap, for these players at least, is fairly well indicated. What may have helped them more, as a third option on the menu, would be some indication on the joint venture options that still seems remote. 
Well, there is still the final guideline to wait for!

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