Foreign banks say they have been caught in a "conflict" situation with respect to the manner in which the Reserve Bank of India [Get Quote] (RBI) conducts inspections at their branches.

These banks operate as branches and do not exist as entities incorporated in India, which make their organisational structure completely different from that of the Indian banks.

Foreign banks do not want the Reserve Bank of India (RBI) to apply the same yardstick for inspection to them as Indian banks as their governance structure differed widely from that of Indian banks.

The difference in the set-ups was not taken into account by RBI inspectors while conducting inspections, creating a "conflict" situation, according to the Indian Banks' Association (IBA)

IBA has written a letter to the RBI urging it to frame suitable inspection methodologies and customise the formats for information the central bank wants to obtain about the operations of foreign banks, without diluting the rigour or coverage of the inspection process.

"The issue is of understanding of set-up (of foreign banks) by (RBI) inspectors. The RBI inspectors are not able to appreciate the difference in the structure of foreign banks," according to a senior banking official.

Unlike private and public sector banks, foreign banks operating in India do not follow a branch-based accounting system. Instead, they report profits under different business units like retail and wholesale.

"RBI inspectors may not find all information that they seek in a branch like public sector banks. For instance, for credit card business details they would have to refer to certain branches in other centres like Chennai or Bangalore. Also, we do not disburse personal loans from branches. At most branches, the inspectors can get details of only deposit accounts," said a foreign banker. Foreign banks operate as different business units and follow a centralised accounting system.

In addition, foreign banks do not have a central board like the Indian banks as they are only branches of entities incorporated overseas.

The foreign banks only have local area advisory boards, which include independent representatives, but do not enjoy any governance powers. These boards function purely as advisory committees.

"The RBI inspectors draw parallels between the boards of private banks and the advisory boards. The advisory board are not policy making bodies. It is also no longer mandatory for foreign banks to have local boards. Also, the local board members are not subject to governance norms or fit and proper criteria (of the RBI)," said the official.

Unlike Indian banks, the advisory board of foreign banks do not have audit committees or risk management committees. All the decision-making powers at branches of foreign banks are largely delegated to their India chief executive officers (CEOs), who do not report to the advisory boards.

Foreign banks have been permitted to operate in India as subsidiaries but the RBI is yet to issue clear guidelines.