Insights

RBI guidelines for setting up of Wholly Owned subsidiaries by foreign banks in India

The framework for setting up of WOS has now been finalized by RBI which favors a subsidiary mode of presence from financial stability perspective. It provides incentives in the form of ‘Near National Treatment’ to WOS of foreign banks which will enable them to open branches anywhere in the country at par with Indian banks

Opportunities & Challenges

Foreign banks who are aspiring to actively participate in the India growth story under a WOS model shall be incentivized …however, there would be significant challenges

Opportunities

  • Foreign banks can expand their footprint in a growing and attractive Indian market.
  • Most of the foreign bank currently operate branches in metro and tier-1 cities. With Regulator permitting banks to expand in Tier-2-6 cities foreign banks can migrate from “exclusive banking” model to more expansive “inclusive banking” both in retail and corporate banking segment.
  • Foreign banks can develop unique competitive proposition and further the cause of financial inclusion by increasing penetration and coverage of banking services (specially in rural areas).
    ‒Banks can tailor the prevalent delivery models by migrating from branch to technology led branchless model.
  • New products and services can be introduced in the Tier-2-3 cities by leverage experience and expertise of banks in metros and tier -1 cities
    Foreign banks can acquire upto 74% stake in private banks as this will help them expand their presence faster.

Challenges

  • Existing banks would also have to ensure scalability of current business models by ensuring the same quality of service in expansion mode.
  • In order to penetrate further, changes in the prevalent business model would be required by developing innovative and ingenious delivery models for serving unbanked.
  • Foreign banks would have to target newer segments (corporate banking, small-and-medium size enterprises, retail banking, SME banking, infrastructure financing, micro finance) as competition in existing segment increases.
  • Foreign banks will also have to comply with the ‘Priority Sector Lending (PSL)’ criteria and will have to target a new set of customers.
  • Foreign banks would have difficulty to comply with single borrowing limits as required by RBI in line with private banks that are not allowed to lend more than 15% of their net worth to a single company and more than 40% to a corporate group due to local subsidiarization.
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