RBI issues its discussion paper on banking structure in India
The Reserve Bank of India (“RBI”) has issued an August 2013 discussion paper entitled “Banking Structure in India – The Way Forward”. The RBI has recognised that today's banking structure in India has both the need and scope for further growth in size and strength. The RBI is reviewing the Indian banking structure to cater to the needs of India’s growing and globalizing economy and to deepen financial inclusion. The RBI has also been guided by lessons learned from the global financial crisis particularly relating to banking structure. The key features of the discussion paper are highlighted below:
- Following on from the “Roadmap for Presence of Foreign Banks in India” published by the RBI in February 2005 and further to the Annual Policy Statement for 2010-11, a Discussion Paper on Presence of Foreign banks in India was released by the RBI in January 2011. Continuing the thinking first set out in these papers, the discussion paper suggests that foreign banks in India should be organised as subsidiaries as opposed to the current branch or representative office structures (as on May 31, 2013, 43 foreign banks operated in India through branches and 47 through representative offices). Although, owing to India’s commitment to the World Trade Organisation, conversion of existing branches into subsidiaries cannot be mandatory, such banks should be encouraged to convert their branches into subsidiaries. For new entrants, the subsidiary structure should be mandatory on reaching a certain size. The RBI will formulate guidelines on the mode of presence of foreign banks in India following feedback on the discussion paper from stakeholders.
- Indian banks follow a structure where a banking company is required to incorporate subsidiaries to undertake non-banking operations. The paper suggests that the financial holding company (“FHC”) structure be adopted wherein the parent company is the FHC which has both bank and non-bank affiliates operating under it.
- Differentiated licensing should be adopted where certain banks will be licensed only for servicing niche segments such as infrastructure financing, retail banking, SME financing, etc. The proposed new licensing policy suggests that there is merit in contemplating “continuous authorisations” for opening new banks in India (compare the present “stop and go” policy of periodical reviews as to whether to allow new banks to enter the market)
- Large Indian banks which have a global presence should be consolidated to create three to four global banks which are able to compete globally with the top international banks. This would enable such banks to generate economies of scale, meet financing needs of infrastructure and large projects and offer India as a banking destination to the world. Such consolidated banks should be permitted to set up branches outside India under a liberalised regime. The paper proposes a tiered structure for other Indian banks, the first of which would consist of such three or four large Indian banks, along with branches of foreign banks in India, with the next tier comprising mid-sized banks, and smaller banks filling the bottom tiers.
- The legal framework governing banks in India hinders consolidation as there are multiple statutes governing banks such as the Banking Regulation Act, 1949, the Companies Act, 1956, Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, State Bank of India Act, 1955, State Bank of India (Subsidiary Banks) Act, 1959, Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003. The paper suggests that all banks should be governed only by the Banking Regulation Act, 1949 and the Companies Act, 1956
- Under the Basel III capitalisation norms, banks require large-scale infusion of capital by shareholders. Since the Government is the majority shareholder of most banks the RBI calculates that the amount of additional capital required to be infused by the Government is INR 900 billion over a period of five years. The paper suggests that the Government’s ownership in public sector banks be reduced to 33% from the existing 51% to reduce the Government’s burden of recapitalising the banks
- There is a need for effective deposit insurance and resolution regimes to deal with bank failures in an economic and efficient manner. In India, failures of commercial banks have been rare, and the beneficiaries of the deposit insurance system have mainly been the urban co-operative banks. The existence of an effective resolution regime is essential for any type of banking structure India may pursue.