Foreign banks in India have, for the past several years, been aspiring for a larger presence in the banking sector. They have also been seeking near-domestic banking treatment from the government and the regulator. The reform was discussed, debated and the regulator had sought comments and suggestions from the industry and the constituents associated with the sector. The major issue was the waiver of the capital gains tax and the stamp duty associated with the conversion.
Now the regulations are notified. The significant deviation between the guidelines and the discussion paper is the tone of communication. The discussion paper had suggested that wholly-owned subsidiary (WOS) would be a preferred structure. The guidelines suggest that regulator is now mandating only some of the banks to take the WOS route. Possibly, as we go along, more and more foreign banks, based on several factors mentioned in the guidelines, will have to set up WOS. Complex structures, time of entry, reciprocity, deposit holder rights, etc. could be those factors.
One of the factors that these bankers are examining is the priority sector lending. The rural presence and inclusion are challenges for foreign banks. The fear that the government and regulator may shift the policy and rules cannot also be over ruled. There is also an issue of local leadership and headquarters connect. The headquarters may perhaps perceive a different market environment compared to what exists here. The true potential associated with larger branch network and the priority sector may not be available to them.
Truly, the beauty of the reform lies in the eyes of the beholder. A segment of new entrants and those banks that have very long-term commitment to Indian market are viewing the reform as a big opportunity to change the business dynamics. One thing however, is very certain, in the next 10 years we will see new leaders in the sector emerging. These foreign banks will bring new ideas, order of governance, products, service levels and technology to this market. We have been missing this from this segment of players for almost more than a decade now.