Banks in India are highly regulated and are very closely monitored by the regulator i.e. by the Central Bank. The main reason for such close supervision is that a bank is not the owner of the money it rather holds the money as a custodian of the deposits. Even a minor breach of trust or confidence of the customer or depositor in the banking and financial system leads to a disastrous impact. The same reasons have to lead to several reasonable restrictions and approval of competent authorities that govern the entry of foreign banks.
Modes of Entry
A bank can enter the Indian Banking by either of the modes:
1. Branch Office;
3. Representative Office or Liaison Office
The major banking business of foreign banks is carrying on through branches only.
As per RBI guidelines, a foreign bank carrying business in India through branch mode provided certain conditions that are prescribed by RBI is not applicable to it.
Certain Conditions as mentioned above are described in the below points:
(i) Foreign banks, no carrying on business in India and on which Certain Conditions are not applicable can choose whether to carry on the banking business through branch mode. Foreign banks can also carry on business in India through Company mode.
(ii) Foreign banks, that are already carrying on business in India through branch mode from August 2010, can continue to carry on the banking business through branch mode.
(iii) Foreign banks, that are already carrying on business in India through branch mode before August 2010, can continue to carry on the banking business through branch mode and such banks can also carry their business through company mode.
Foreign banks that desire to establish Branch Office in India need to approach RBI. The application to Branch Office of Foreign Bank is to be received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India and Central Office.
The Central Bank has issued the framework for setting up of Wholly Owned Subsidiaries (WOS) by foreign banks in India. The foreign bank can enter into the Indian market in the form of a Company, which shall be a WOS of the foreign bank.
The scheme for setting up a subsidiary by foreign banks in India is summarised below:
(i) Foreign banks, not carrying on banking business in India and to which Certain Condition is applicable shall carry on banking business in India only through a WOS.
(ii) Foreign banks, that are already carrying on business in India through branch mode from August 2010, to which Certain Conditions are applicable, would have to convert their branches to Company.
(iii) Foreign banks, that are already carrying on business in India through branch mode before August 2010 have the option to carry on business in India either through Company mode or Branch mode.
Additional Application Process for Bank license w.r.t to Foreign Banks.
In case of foreign entities the RBI must satisfy the following:
- The government or law of the parent country does not discriminate against banking companies registered in India.
- The banking company complies with the provisions of the Banking Regulation Act which is applicable to banking companies incorporated outside India.
Legislation governing Foreign Banks.
Banking business and financial services are governed primarily by the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 empowers the Central Bank to issue rules, regulations, directions, and guidelines on issues relating to banking and the financial sector. Cross-border transactions are governed primarily by the Foreign Exchange Management Act, 1999.
India has several other financial sector regulators, which includes the following:
- Securities Exchange Board of India (SEBI): SEBI is the leading regulatory authority next to RBI and deals with the securities market in India.
- Insurance Regulatory and Development Authority of India (IRDAI): IRADI regulates the insurance sector.
- Insolvency and Bankruptcy Board of India (IBBI): IBBI regulates the process related to conducting insolvency proceedings under the Insolvency and Bankruptcy Code.
Eligibility for setting up WOS
a) Setting up of WOS by a foreign bank in India has to get the approval of the home country regulator/supervisor.
b) A foreign bank applying for setting up a WOS in India should satisfy the central bank that is subject to adequate supervision as per the internationally accepted standards, and hence includes the consolidated supervision in its home country.
c) The factors taken into account while considering applications for setting up a foreign banks subsidiary in India includes the following:
- Economic and political relations with the home country of the bank,
- Reciprocity with the bank’s home country,
- Financial soundness,
- Ownership pattern,
- Home country and banks rating by a rating agency of international repute International presence of the bank,
- Adequate risk management and internal control systems.
The above-mentioned criteria represent the minimum requirements the bank will undergo while applying for a license under section 22 of the Banking Regulation Act. The final decision whether to grant the license or not is on the discretion of the RBI
Under the FDI policy as set out in the Government of India’s Department of Industrial Policy and Promotion (DIPP) WOSs of the foreign banks, that are locally incorporate but are foreign-owned and controlled companies, are treated as “foreign banks”. A company owned by non-residents refers to an Indian company where over 50% of the capital in it is beneficially is owned by non-residents is “controlled“ by non-residents.
Frequently Asked Questions
What are the modes of entry pertaining to Foreign Banks?
The mode of entry available to Foreign Banks is as follows:
- Branch office
- Representative office
How long does the RBI take to issue a decision with respect to Foreign Banks?
There is no such specific time prescribed for the RBI to issue such a decision but typically this process takes about 18 months or longer. Further, it also depends on discussions with the RBI, clarifications, and information sought by the RBI, and how quickly these issues are resolved.
What are the regulatory acts that govern the functioning of foreign banks in India?
- Companies Act, 2013
- Banking Regulation Act, 1949
- Reserve Bank of India Act, 1934
- Foreign Exchange Management Act, 1999
- Payment and Settlement Systems Act, 2007
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje