Procedure of How Foreign Banks can Operate in India

INTRODUCTION

For a foreign bank to operate in India, that is, if a foreign company wants to set up a bank in India, it has to follow certain rules and regulations that are set by the RBI (Reserve Bank of India).

Application: The foreign bank willing to operate in India must apply for a banking license as per Section 22 of the Banking Regulation Act, 1949. The application must include details like the bank’s structure, capital etc. The Foreign bank needs to submit a detailed business plan as well to the RBI.

It is up to the foreign bank to decide whether it decides to operate as a branch or set up a WOS ( Wholly Owned Banking Subsidiary). When it comes to WOS, there needs to be registration as per the Companies Act, 1956.

BRANCHES CAN BE CONVERTED INTO WOS AS WELL:

Firstly, WOS is a bank that is completely owned by a foreign company but it operates like an Indian company and follows Indian rules.

Foreign Banks that already exist in India can convert their branch into a WOS. When it comes to market operations and expansion, both, WOS and branch offices will be treated the similar way.

GUIDELINES FOR SETTING UP OF WOS BY FOREIGN BANKS:

Whether the parent bank is eligible or not:

The foreign bank must be regulated and monitored by the financial authority of it’s home country and the RBI must be satisfied with this.

In order to open or convert banks in India, the foreign banks need approval from its country’s regulator as well.

OTHER FACTORS THAT ARE TAKEN INTO ACCOUNT:

1. The relationship between India and its home country.

2. The financial status of the bank.

3. The bank’s reputation also plays a very important role in determining whether a WOS can be set up by foreign banks or not.

4. How many countries does this bank operate in?

CAPITAL:

The minimum start up capital must be 3 billion for a WOS.

The WOS must also maintain a capital adequacy ratio (CAR) of 10%.

Capital Adequacy Ratio:It is like a safety net. The RBI sets this so that the banks do not face financial trouble or they don’t lend too much.

COMPOSITION OF THE BOARD OF DIRECTORS:

The Board of Directors of the bank, that is, the people who manage the bank must:

The Board must have at least 50% Indian residents.

The Board must have at least 50% non executive directors, in order to keep the decision unbiased.

The Board must have one third independent directors who are not in any way connected to the foreign parent company.

It is also important for the Directors to meet Fit and Proper criteria of RBI which basically means the director must have a clean record and they must be qualified for this.

LICENSING AND OTHER REQUIREMENTS:

The licensing requirements of a WOS of a foreign bank is similar to the new private banks in India and the WOS must meet those requirements. This makes sure that the WOS is operating as per proper rules and regulations.

The RBI has the power to set limits to their operations as well in order to align with WTO( World Trade Organisation) rules and India’s needs.

The WOS of a foreign bank must operate according to Indian laws and those are the Companies Act,1956, Banking Regulation Act,1949 and RBI Act,1934.

It is the duty of WOS to follow the rules and guidelines that are set or issued by RBI as well.

THINGS TO CONSIDER WHEN A FOREIGN BANK BRANCH IS WILLING TO CONVERT INTO A WOS:

The procedure that is applied to set up a WOS will be applied in this case also, similar guidelines, same rules will be applied here as well. But this comes with certain extra conditions as well:

1. Supervisory comfort:

The RBI will evaluate whether the foreign bank branches in India are operating responsibly or not, whether they are following the rules and regulations and meeting other requirements.

How well the bank manages its branches is an important factor to consider whether the conversion will be allowed or not.

2. Capital Requirements:

The WOS must have a minimum net worth of 300 crores after conversion.

The WOS must have a capital adequacy rate of 10%. The RBI will assess the financial status of the bank’s branch as well.

FOREIGN BANKS RIGHT IN BUYING STAKES IN PRIVATE SECTOR BANKS:

In order to invest in private sector banks the foreign banks can apply to RBI.

The RBI will assess the foreign bank’s major shareholders as well in order to ensure that they are trustworthy, they are capable,that is, they are fit and proper for this.

The RBI also has the power to set or issue extra rules or conditions for these investments.

EXAMPLES OF A FEW FOREIGN BANKS IN INDIA:

Citibank: One of the oldest foreign banks in India that has the duty to focus on retail and institutional banking services.

Standard Chartered Bank: The bank focuses on providing numerous financial services. For ex trade finance, wealth management etc.

HSBC bank: This bank helps the Indian exporters when it comes to managing trade with Europe and Asia.

CONCLUSION:

This basically is a balanced approach in order to integrate foreign banks into the Indian Banking system. This basically helps in promoting growth and innovation while safeguarding the domestic sector’s interests as well. Through this India aims to create a more inclusive and globally competitive banking system.