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Foreign banks cool to Indian welcome

The finance ministry's decision to allow foreign banks to set up their subsidiaries in India with greater flexibility in operation has failed to evoke any enthusiasm among the leading foreign banks operating in India.

Senior executives from these banks said that there are several pros and cons in the government's proposal which is still to get the final touches.

However, on plain reading, they said that the conversion of a foreign bank branch into a subsidiary would immediately attract various local laws such as a higher level of priority sector lending, tax on dividend pay-outs and compliance with the Company Act.

Currently, the stipulated norm for priority sector lending by foreign banks is 32 per cent as against the 40 per cent norm for all other banks operating in India.

Similarly, foreign banks repatriate their profits to their parent companies abroad but in case of subsidiaries, they have to pay out dividends loaded with taxes.

"We are comfortable since there is a fair amount of flexibility that we get from the Reserve Bank of India now,'' Hong Kong and Shanghai Banking Corporation's, country head (personal financial services) Vivek Kudva said.

RBI sources said the purpose behind allowing foreign banks to set up their units in India was to offer them a greater operational flexibility, both in terms of branch expansion and growth in business activities.

This kind of dual licencing policy is in existence in many developed and developing nations where foreign banks are allowed even to take over local private banks, infusing higher flow of foreign exchange into the country, they said.

However, the sources felt that the government could come out later with certain sectoral caps in foreign direct investment and foreign institutional investment in the banking sector along with detailed guidelines.

Kudva said that his bank has no problem in expanding its network since the central bank has been granting licences in adequate numbers to major banks.

This is happening particularly when many foreign banks which entered with one or two branches, later closed their shutters due to poor performance.

In case of large foreign banks, Kudva said, ''We have been investing about a couple of hundred millions in the Indian business mainly in technology, branch networking and manpower to sustain our growth at an annual rate of 20 to 30 per cent.''

In 2001, HSBC recorded a growth of 50 per cent in its card business and 20 per cent in deposits on a customer base of over one million.

Romesh Sobti, chief executive officer of ABN Amro Bank, said that many foreign banks were looking at the cost of converting their branches into subsidiaries notwithstanding the fact that they would be in a position to raise finances locally without depending much on the parent companies.

Though the tax rates for foreign banks have been brought down from 48 to 42 per cent in the recent Budget proposal, he said the incentives to change over not big enough since most of the foreign banks had been operating in india under the rigid laws in the past several decades.

''We continue to be regulated by different law enforcing agencies in India,'' he added.

UNI

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