India issues a single class of banking licence to foreign banks and does not require them to graduate from a lower to a higher category of banking licence over a number of years as is the practice followed in certain other jurisdictions.
This places them virtually on the same footing as an Indian bank and does not place any restrictions on the scope of their operations. This is in contrast with practices in many other countries.
No restrictions have been placed on the establishment of non-banking financial subsidiaries in India by foreign banks or their group companies. Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory rate of premium. In many other countries there is a discriminatory regime.
The prudential norms applicable to foreign banks for capital adequacy, income recognition and asset classification are, by and large, the same as for the Indian banks. Unlike some of the countries where overall exposure limits have been placed on the foreign-country related business, India has not placed any restriction on the kind of business that can be routed through the branches of foreign banks.
This has been advantageous to foreign bank branches as the entire home-country business is generally routed through these branches. Substantial FII business is also handled exclusively by foreign banks.
In fact, some Indian banks contend that a certain amount of positive discrimination exists in favour of foreign banks by way of lower priority sector lending requirement at 32 per cent of the adjusted net bank credit as against a level of 40 per cent required for Indian banks.
Unlike in the case of Indian banks, the sub-ceiling in respect of agricultural advances is also not applicable to foreign banks whereas export credit granted by foreign banks can be reckoned towards priority sector lending obligation, which is not permitted for Indian banks.
At the end of June 2007, foreign banks had a 6.11 per cent share in total deposits in the Indian commercial banking system and 6.83 per cent in terms of advances. Foreign banks were far more dominant in the off-balance sheet business with a market share of as high as 72.66 per cent.
Besides foreign banks, there are also two large Indian private sector banks in which the non-resident ownership is very close to the 74 per cent permitted, which is why they can be considered as incorporated in India but predominantly foreign-owned banks.
These banks together with the foreign banks, have a combined market share in the deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent, respectively, which, by no means, are insignificant levels.
Moreover, there are also about 10 large listed public sector banks (PSBs) in which the non-resident/FII shareholding was close to the permitted ceiling of 20 per cent, as at March-end 2007. In these PSBs, resident private shareholding would thus be close to 30 per cent only.
In the foreign exchange market, these banks had a 41 per cent share in the total forex turnover in 2005-06 and this rose to 52 per cent in the first half of 2007-08.
Another dimension of the foreign banks' functioning in India is the returns generated from their Indian operations. The net profit per branch for foreign banks in India for the year 2005-06 was Rs 11.99 crore (Rs 119.9 million) as against the corresponding figure of Rs 0.33 crore (Rs 3.3 million) for PSBs.
Further, for the year 2006-07, the Return on Assets (ROA) of foreign banks was 1.65 per cent while the Return on Equity (ROE) was 14.02 per cent, as against the corresponding figures of 0.82 per cent and 13.62 per cent for PSBs.
These returns need to be viewed in the context of the international benchmarks for these parameters, which are generally considerably lower.
Yet another aspect of the foreign banks' operations is the authorisation of their branches in India. As per India's existing WTO commitments, our obligation is to permit to foreign banks only 12 licences per year, including new entrants and existing banks - this does not include ATMs.
During the period 2003 to October 2007, RBI authorised as many as 75 branches of foreign banks in India, excluding the off-site ATMs set up by them.
In this context, an illustration would be revealing of the ground realities. Between 2003 and October 2007, India had granted 19 authorisations to US-based banks, most of which also stand utilised.
However, during the same five-year period, the US did not authorise any office of Indian banks in US territory, vis-à-vis the requests for setting up three branches, two subsidiaries and nine representative offices. Some of the requests have been pending with US authorities for more than five years.
Yet another aspect of foreign participation in the Indian financial sector is the foreign ownership of NBFCs operating in India. As of August 2007, in systemically important non-deposit-taking (ND-SI) NBFCs, those with some element of foreign ownership had an asset base of Rs 87,542 crore (Rs 875.42 billion) and accounted for more than 26 per cent of the total assets of this class of NBFCs.
Of these, the NBFCs with majority foreign ownership had an asset base of Rs 34,095 crore (Rs 340.95 billion) accounting for 9.2 per cent of the total assets of this class of companies. The ND-SI NBFCs, which are not closely regulated by the RBI, therefore, provide in certain ways a means of expanding the reach of the foreign banks in India.
Thus, the current policy environment enables a fair level of foreign participation even in the non-banking financial sector of the country.
Excerpted from an address delivered by RBI Deputy Governor V Leeladhar at BANCON-2007