Global ratings agency Fitch Ratings has said that the Reserve Bank of India’s recent steps aimed at subsidiarisation of foreign banks is unlikely to alter the banking sector’s competitive landscape by itself. The move, however, does signal the prospect of further reforms, it said.
Fitch has pointed out two key challenges that the foreign banks will face as a result of regulatory treatments that is nearly on par with domestic banks. These “formidable challenges” are meeting priority sector lending (PSL) norms and maintaining at least 25% of all new branches in unbanked centres.
While Fitch acknowledges that wholly-owned subsidiaries (WOS) of foreign banks will have the freedom to open branches, list on Indian exchanges and acquire businesses, all of which should encourage them to do more business in India, it says that the regulatory concerns may be challenging.
“Foreign banks with 20 or more branches are anyway obliged to comply with the broad and sub-targets under PSL, and have until FY18 to do so. However, their ability to achieve this remains largely untested, as even Indian banks find it hard at times to meet these targets on a consistent basis,” said Fitch.
Moreover, meeting PSL guidelines may alter risk profiles and intensify competition in areas that are not traditional growth areas for foreign-owned entities — such as agribusiness, for which a sub-limit of 18% is applicable, it added.
Fitch believes that commercial reasons to adopt the WOS model are not compelling.
The option of converting to subsidiaries was also made available during the first phase of India's foreign bank reforms between FY05-FY09, though foreign banks refrained from exercising this option, it said.
The newly introduced framework is broadly based on the two core principles of reciprocity and single mode of presence, said Fitch. But, notwithstanding reciprocity, issues around parent shareholding and control will also have to be resolved in time before existing institutions evince greater interest in expanding their local presence.