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Priority lending must for foreign banks seeking branch expansion

Updated: Nov 07, 2013 05:48:02pm
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New Delhi, Nov 7 (KNN)  Reserve Bank of India has allowed foreign banks in India to set up wholly owned subsidiaries  (WOS) and enjoy all benefits of Indian banks, including freedom to open new branches, but they will have to take obligation of 40 per cent priority sector that includes MSMEs.

“Priority Sector lending requirement would be 40 per cent for WOS like domestic scheduled commercial banks with adequate transition period for existing foreign bank branches converting into WOS,” said RBI in its framework for foreign banks.

Micro and small enterprises fall under priority sector category.

On the new policy, RBI said that foreign banks would be able to fully participate in the development of the Indian financial sector.

The advantage for foreign banks is that they can open more branches.

“The branch expansion guidelines as applicable to domestic scheduled commercial banks would generally be applicable to WOSs of foreign banks except that they will require prior approval of RBI for opening branches at certain locations that are sensitive from the perspective of national security,” the press release said.

“The policy is guided by the two cardinal principles of (i) reciprocity and (ii) single mode of presence. As a locally incorporated bank, the WOSs will be given near national treatment which will enable them to open branches anywhere in the country at par with Indian banks (except in certain sensitive areas where the Reserve Bank’s prior approval would be required).

“The policy incentivises the existing foreign bank branches which operate within the framework of India’s commitment to the World Trade organisation (WTO) to convert into WOS due to the attractiveness of near national treatment. Such conversion is also desirable from the financial stability perspective,” it said.

However, to provide safeguards against the possibility of the Indian banking system being dominated by foreign banks, the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size. Certain measures from corporate governance perspective have also been built in so as to ensure that the public interest is safeguarded.  (KNN/ES)

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