In its recent branch licensing draft circular, the RBI said a greater weightage needs to be given to the nature and scope of banking facilities provided by banks to common people, particularly in underbanked/unbanked areas, that is tier-II and tier-III towns.

In response to the draft circular, foreign banks said RBI should not consider foreign banks opening branches in such towns as within the WTO commitment.

These semi-urban and rural areas will also help the foreign banks to meet their priority sector obligations, banking sources said.

A senior banker said, "As per WTO obligations, foreign banks are given only those many branch licences in a financial year, as what the concerned bank's parent regulator will allow for an Indian bank [Get Quote] in that country. It is true that foreign banks need to meet the priority sector lending norms in India, which comprises 32 per cent of the net bank credit. Although there are alternatives like contract farming, we find it difficult to meet the priority sector stipulations due to lack of physical footprint."

Most multinational banks are looking at India as a potential growth market. Hence, they want to spread their tentacles by rolling out more branches in newer cities/towns and penetrate further in existing cities/towns.

"Of the 100 cities classified as unbanked and underbanked, we have already recognised few locations for opening branches. However, we require some clarifications from the regulator in the wake of new branch licensing draft circular," said a senior official with a MNC bank.