The escalating tensions in Bahrain following the recent unrest in West Asia and North Africa have prompted Indian banks to put on hold their expansion plans in the island nation.
Bahrain has of late emerged as a regional hub for banking because of low tax rates and easy regulations. At present, 409 banks and financial institutions have operations there.
Private lender YES Bank had sought the Reserve Bank of India's (RBI's) nod to open a branch in Bahrain. It has decided to withdraw the application.
"Given what has happened, we will most likely modify the application to mention some other geography. We are in the process of doing that," said Jaideep Iyer, deputy chief financial officer and president, financial management, YES Bank.
State-owned Canara Bank has got a licence from the Central Bank of Bahrain to set up a wholesale bank branch. Senior officials say the bank has decided to delay its entry into Bahrain.
"We are watching the situation," said S Raman, chairman and managing director, Canara Bank, declining to say anything more.
India's largest lender, State Bank of India (SBI), had relocated some employees from the Bahrain branch after the crisis broke out. The bank says they will be moved back as the situation there appears to be improving.
A senior SBI official said the bank had moved out a part of its international assets from the Bahrain branch's books. The bank was not routing fresh non-Bahrain
Because of tax advantages, banks often route some of their global business through Bahrain offices. SBI has two branches - a full commercial branch and a wholesale bank branch - in Bahrain.
"Why did we choose Bahrain? The predominant criteria for any geography outside India are the ease of regulation, the ease of entry and the cost. Bahrain fits the bill," said YES Bank's Iyer.
These benefits now seem to be overshadowed by the political instability in the region. The government in Bahrain declared an emergency in March after protests from Shiites.
"In a way, we are lucky not to have looked at Bahrain. We are planning to have a branch in Dubai," said a top official of Union Bank of India.
The government-owned lender has an office in Dubai and now plans to open a branch. He requested anonymity as the bank is yet to get RBI's approval for its Dubai branch.
YES Bank said it was considering Dubai and Hong Kong for opening an overseas branch.
"Dubai International Financial Centre (DIFC) is one option. We are also evaluating options in East Asia. I think Hong Kong could be an option," said Yes Bank's Iyer.
"The good thing about HKMA (Hong Kong Monetary Authority) is it is reasonably proactive. The tax rates are also moderate. Hong Kong is also probably a better geography than DIFC for the brand," he said.