How RBI regulates Foreign Banks ?

On February 28, 2005, RBI had released a road map for the presence of foreign banks in India. This was the first ever documented policy on foreign banks in India. This road map suggested two phases. During the first phase between March 2005 to March 2009; the foreign banks were allowed to operate in India only by way of setting up a Wholly Owned Subsidiary or converting the existing branches into a WOS. The second phase had to be launched in view of the experienced gained in the first phase. After the 2008-09 financial market turmoil, the RBI did not immediately go for second phase but reviewed the international policies and environment.

 Current Number of Foreign Banks in India

As of December 2014, there are 43 foreign banks from 26 countries operating as branches in India and 46 banks from 22 countries operating as representative offices in India. Apart from that, few foreign banks have entered into India via the NBFC route.

There are 334 foreign bank branches in India. This strength is less than 1% of the total branch network in the country. However, they account for approximately 7% of the total banking sector assets and around 11% of the profits.

Most of the foreign banks in India are niche players and their business is usually focused on trade finance, external commercial borrowings, wholesale lending, investment banking and treasury services. Some other banks are confined to private banking and wealth management.

RBI policy towards presence of foreign banks in India is based upon two cardinal principles viz. reciprocity and single mode of presence.

By reciprocity, it means that overseas banks are given near national treatment in India only if their home country allowed Indian banks to open branches there without much restrictions. By single mode of presence, it means that RBI allows either of the branch mode or a wholly owned subsidiary (WOS) mode in India.

Some other policy guidelines of RBI towards foreign banks are as follows:

  1. Banks have to adhere to mandated Capital Adequacy requirements as per Basel Standard.
  2. They should have to meet minimum capital requirement of Rs. 5 billion.
  3. They should need to maintain minimum CRAR at 10%
  4. Priority sector targets for foreign banks in India is 40%.

Further, the foreign banks have to follow other norms as set by Reserve Bank of India.