Project Report

On

Guidelines regarding Entry of New

Foreign Bank

Sumeet Singh

MBA (Gen)

Roll. No.= 89

Sec=B

Contents

Sr.No. Subject Covered Page No.

1 Introduction 3

2 Road map for expention of foreign

bank in India

4 - 6

3 Format of Application by a Foreign

Bank to Reserve Bank of India

7 - 9

4 Guidelines By RBI 10 - 11

5 Accounting, Prudential Norms and

other requirements

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2

1. Introduction :

The foreign banks in India are slowly but steadily creating a

niche for themselves. With the globalization hitting the world, the

concept of banking has changed substantially over the last couple

of years. Some of the foreign banks have successfully introduced

latest technologies in the banking practices in India. This has made

the banking business in the country more smooth and interesting

for the customers.

The concept of foreign banks in India has changed the prevailing

banking scenario in the country. The banking industry is now more

competitive and customer-friendly than before. The foreign banks

have brought forth some innovations and changes in the banking

industry of the country.

According to the new rules set by Reserve Bank of India in the new

budget, some decisions regarding foreign banks in India have been

taken. The steps taken by the central monetary authority provide

some extent of liberty to the foreign banks and they are hopeful to

grow unshackled. The foreign banks in India are now allowed to set

up local subsidiaries in the country. The policy also states that the

foreign banks are not allowed to acquire any Indian bank unless the

Indian bank is listed as a weak bank by the RBI.

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2. Road map for expention of foreign bank in

India :

The year 2009 was supposed to be an inflexion point would for

foreign banks, the year they be given greater operational freedom

to increase their presence in India. That was the plan in February

2005, when the banking regulator, the Reserve Bank of India (RBI),

unveiled a road map for foreign banks, a year after the Ministry of

Commerce and Industry had revised the guidelines on foreign direct

investment (FDI) in the banking sector

Foreign banks have brought latest technology and latest banking

practices in India. They have helped made Indian Banking system

more competitive and efficient. Government has come up with a

road map for expansion of foreign banks in India.

The road map has two phases. :

Phase I: (March 2005 to March 2009)

1. New banks – first time presence

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Foreign banks wishing to establish presence in India for the

first time could either choose to operate through branch presence

or set up a 100% wholly owned subsidiary (WOS), following the one-

mode presence criterion.

2. Existing banks – Branch expansion policy

For new and existing foreign banks, it is proposed to go

beyond the existing WTO commitment of 12 branches in a year. The

number of branches permitted each year has already been higher

than the WTO commitments. A more liberal policy for underbanked

areas will be followed. Branch licensing procedure will continue to

be as per current practice.

3. Conversion of existing branches to Wholly Owned Subsidiaries

:

In the first phase, foreign banks already operating in India will

be allowed to convert their existing branches to WOS while

following the one-mode presence criterion. The WOS will be treated

on par with the existing branches of foreign banks for branch

expansion in India. The Reserve Bank may prescribe market access

and national treatment limitation consistent with WTO, as also other

appropriate limitations to the operations of WOS consistent with

international practices and the country's requirements.

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Phase II : (April 2009)

1. According Full National Treatment to Wholly Owned

Subsidiaries of Foreign Banks :

In the second phase, the removal of limitations on the

operations of the WOS and treating them on par with domestic

banks to the extent appropriate will be designed and implemented

after reviewing the experience with Phase I and after due

consultations with all stakeholders in the banking sector.

2. Dilution of Stake in Wholly Owned Subsidiaries :

In this phase, the WOS of foreign banks on completion of a

minimum prescribed period of operation will be allowed to list and

dilute their stake so that at least 26 per cent of the paid up capital

of the subsidiary is held by resident Indians at all times consistent

with para 1(b) of the Press Note 2 of March 5, 2004. The dilution

may be either by way of Initial Public Offer or as an offer for Sale.

3. Mergers and Acquisition of any Private Sector Bank in India :

In the second phase, after a review is made with regard to

the extent of penetration of foreign investment in Indian banks and

functioning of foreign banks, foreign banks may be permitted,

subject to regulatory approvals and such conditions as may be

prescribed, to enter into merger and acquisition transactions with

any private sector bank in India subject to the overall investment

limit of 74 percent.

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3. Format of Application by a Foreign Bank to

Reserve Bank of India :

I. General Information

Name of the applicant bank:

Place and date of incorporation;

Address of Head Office:

II. Ownership & Management

List of names and addresses of directors and their

qualifications and principal business.

Details of shareholders holding 10 per cent or more of voting

stock and their principal business

Name of the Chief Executive Officer

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Name & designation of senior official at Head quarters that will

be responsible for the bank's operations in India

III. Structure

Organizational chart showing subsidiaries and associated

companies

Countries in which the bank and its subsidiaries operate

No. of domestic and overseas branches

IV. Financial Position

Highlights of financial position of the bank based on last three

years financial statements

Capital adequacy ratio as per BIS standards indicating Tier - I

and Tier - II capital separately

Ranking in home country and global ranking

Credit ratings by international credit rating agencies

V. Supervisory Arrangements

Details of supervisory arrangements to which the bank is

subject in its country of origin.

Home country regulations on entry of foreign banks

8

VI. Details of existing relationship with India

Details of correspondent banking relationships with Indian

banks and the aggregate amount of lines of creditor other

limits extended to them.

Details of foreign currency loans extended to Indian companies

and other types of business transacted such as underwriting of

equity/ debt issues of Indian companies etc.

VII. Details of proposed branch operations in India

Location of branch:

Details of proposed initial capitalisation :

Number of expatriate officials proposed to be posted in India

Purpose of opening the branch in India the benefits to the

different sectors in the Indian community and activities

proposed to be undertaken.

Business Plan.

VIII .Documents to be enclosed

Copies of Memorandum Articles of Association or similar

documents

Last three years financial statements

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Certificate from supervisory authority that the applicant bank

is duly authorised as a bank, is of good standing and it is under

their consolidated supervision.

Copy of the approval/authorisation given by the home country

supervisor/ regulator permitting to open a branch in India.

Approval letter from the Bank's Board.

4. Guidelines By RBI :

New rules announced by the Reserve Bank of India for the foreign

banks in India in this budget has put up great hopes among foreign

banks which allow them to grow unfettered. Now foreign banks in

India are permitted to set up local subsidiaries. The policy conveys

that foreign banks in India may not acquire Indian ones (except for

weak banks identified by the RBI, on its terms) and their Indian

subsidiaries will not be able to open branches freely.

1. Foreign banks applying to the RBI for setting up a WOS in

India must satisfy RBI that they are subject to adequate

prudential supervision in their home country. In considering

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the standard of supervision exercised by the home country

regulator, the RBI will have regard to the Basel standards.

2. The setting up of a wholly-owned banking subsidiary in India

should have the approval of the home country regulator.

3. Other factors that will be taken into account while considering

the application are given below:

a) Economic and political relations between India and the

country of incorporation of the foreign bank

b) Financial soundness of the foreign bank

c) Ownership pattern of the foreign bank

d) International and home country ranking of the foreign

bank

e) Rating of the foreign bank by international rating

agencies

f) International presence of the foreign bank.

4. The minimum start-up capital requirement for a WOS would

be Rs. 3 billion and the WOS shall be required to maintain a

capital adequacy ratio of 10 % or as may be prescribed from

time to time on a continuous basis, from the commencement

of its operations.

5. The parent foreign bank will continue to hold 100 per cent

equity in the Indian subsidiary for a minimum prescribed

period of operation.

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6. The composition of the Board of directors should meet the

following requirements:

a) Not less than 50 per cent of the directors should be

Indian nationals resident in India.

b) Not less than 50 per cent of the Directors should be non-

executive directors.

c) A minimum of one-third of the directors should be totally

independent of the management of the subsidiary in

India, its parent or associates.

d) The directors shall conform to the ‘Fit and Proper’ criteria

as laid down in RBI’s extant guidelines dated June 25,

2004.

e) RBI’s approval for the directors may be obtained as per

the procedure adopted in the case of the erstwhile Local

Advisory Boards of foreign bank branches.

5. Accounting, Prudential Norms and other

requirements :

1. The WOS will be subject to the licensing requirements and

conditions, broadly consistent with those for new private

sector banks

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2. The WOS will be treated on par with the existing branches of

foreign banks for branch expansion. The Reserve Bank may

also prescribe market access and national treatment limitation

consistent with WTO as also other appropriate limitations to

the operations of WOS, consistent with international practices

and the country’s requirements.

3. The banking subsidiary will be governed by the provisions of

the Companies Act, 1956, Banking Regulation Act, 1949,

Reserve Bank of India Act, 1934, other relevant statutes and

the directives, prudential regulations and other

guidelines/instructions issued by RBI and other regulators from

time to time.

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