Requirements for Entry and Regulation of Foreign Banks The foreign banks to establish their branches in India are subject to the rules and regulation prescribed by the Reserve Bank of India. Banks in India are minutely regulated and closely monitored by the regulating authority, the Reserve bank of India, abbreviated as RBI. Analyzing the fact that the banks are not the owner of the...
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Requirements for Entry and Regulation of Foreign Banks
The foreign banks to establish their branches in India are subject to the rules and regulation prescribed by the Reserve Bank of India.
Banks in India are minutely regulated and closely monitored by the regulating authority, the Reserve bank of India, abbreviated as RBI. Analyzing the fact that the banks are not the owner of the money in its treasury, but it is the hard-earned result of the citizen, who trusts the Banks to keep their money secured.
The banking regulation in India allows the entry of foreign banks following certain rules and subject to certain conditions. In this article, we shall discuss the rules and regulation required for the entry of foreign banks in India.
Provision of entry of the foreign bank
The foreign banks can enter India only through branches. In 2008, the global financial crisis reflected in a report that the complexity and the interconnection of the financial institutions are increasing. This is being supported by the cross border resolution regimes.
As per the provisions at present, the foreign banks are eligible only if the RBI allows them to set up a business in the Indian territory through only one mode, that is either the branch mode or the wholly-owned subsidiary mode.
After the inflation occurred in 2008, the RBI issued a Discussion paper in 2011 explaining the mode by which the foreign banks can be present in India.
The Reserve Bank of India conferred the provisions under Sec. 35A and Sec. 44A of the Banking Regulation Act 1949. In the public interest and for the benefit of the banking policies, the RBI has issued a 'Scheme for setting up Wholly-Owned Subsidiaries (WOS) by the foreign banks in India'.
Scheme for setting WOS by Foreign Banks in India
The foreign banks which are not carrying on a banking business in India and wish to do so can do that by the wholly-owned subsidiaries or through branch mode.
From August 2010, the foreign banks which have commenced the banking business in India, required to furnish an undertaking declaring that the banks would convert the branches into wholly-owned subsidiaries, as per the scheme passed in 2011.
The foreign banks who commenced their business before August 2010 received a leverage to carry on the business through the branch mode. However, they were provided with an option to convert the branches into wholly-owned subsidiaries.
For both kinds, the banks shall be subject to the World Trade Organization commitments agreed by India.
What is the eligibility of setting up a wholly-owned subsidiary?
For the setting up of the wholly-owned subsidiary by a foreign bank in India, there must be approval of the regulator obtained. While making an application to enter the Indian banking sector by a foreign bank, the following factors must be taken into account:
● The economic and political relations with the country of the parent bank.
● Mutuality with the home country of the bank
● Must be financially sound
● The ownership pattern must be complying with India's commitment to WTO
● The International ranking of the home country and the parent bank by a reputed agency.
● The home country as well as the parent bank must be securing a good bank rating by an international rating agency.
● The international presence of the bank
● Risk management capacity and the internal control systems.
What are the conditions required for the presence of WOS only?
The foreign bank commenced their business in India after August 2010 are carrying on the business only through a wholly-owned subsidiary and they are subject to these conditions:
● Banks incorporated in a jurisdiction having the legislation giving a preference to the claim to the deposit of the home country in a winding-up process.
● The banks who do not have adequate disclosure requirement in their home country jurisdiction.
● Banks with complex structures.
● Banks not widely held.
● If the adequacy of supervisory is not satisfactory to RBI regarding arrangements and market discipline in the country of their incorporation.
● For other reasons, the RBI considered it necessary for the subsidiary form of presence of the bank.
How to make an application to RBI buy a foreign bank?
By Form, III prescribed vide Rule 11(a) of the Banking Regulation (Companies) Rules 1949 along with the required additional information should be made to the Principal Chief General Manager of the RBI addressed to its main office in Mumbai.
The minimum capital requirement for a foreign bank to enter India is the paid-up voting equity capital for WOS is Rs. 5 billion.
The WOS of a foreign bank, being a company incorporated in India, may declare dividend like domestic banks subject to criteria laid down by RBI.
An applicant for a new WOS bank licence will be required to forward a business plan, that must be viable and realistic, including a branch expansion plan for one year, along with its application. The address of the business model must be towards the bank planning to achieve financial inclusion and retail banking.