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April 26, 2002 | 1255 IST
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Capital norms for foreign bank subsidiaries likely

BS Banking Bureau

The Reserve Bank of India's forthcoming credit policy is likely to set the capital norms for the foreign banks to set up subsidiaries in the country.

The Union Budget for 2002-03 has given an option to foreign banks to either operate as branches of their parent bank's or to set up subsidiaries. A foreign bank can choose one of the two options.

According to the Budget proposal, these subsidiaries will have to adhere to all banking regulations, including priority sector lending norms applicable to other domestic banking norms.

However, amendments have been proposed in the Banking Sector Regulations Act 1949 to relax the ceiling of voting right of 10 per cent for such subsidiaries.

According to bankers, the RBI is likely to peg the initial share capital of the foreign banks' subsidiaries at around Rs 2 billion - a stipulation applicable to the new series of two new private sector banks which have been given in-principle approval to set up shops.

The new banks' share capital will be raised to Rs 3 billion within three years of commencement of business.

Foreign banks currently operate in India as branches of the parent. Though not explicit, there are also restrictions on new branch openings by these banks in the country. The subsidiary route will help the foreign banks overcome restrictions on branches but they will also have to open rural branches, which they are currently exempted from.

They will also be subjected to normal banking operations rules like 40 per cent priority sector lending other than export financing. The priority sector lending includes loans to the SSI sector and agriculture.

According to a senior foreign banker, these are some of the problems, which a foreign bank will have to contend with in case they convert themselves into a subsidiary. At present, export financing is a part of the priority sector lending for foreign banks.

"The subsidiaries will be governed by the Companies Act. Also the bank will have to set up a local board.

"There could also be caps on the remuneration limits of the directors. We are waiting to see whether there will have to be any dilution of stake through this route. Banks are not going to rush in for opening subsidiaries. They are waiting to see the implications," said a senior foreign bank.

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