Lok Sabha Question No. 1022 (UNSTARRED), answered on 2015-12-04
Subject: Foreign Banks in Rural Areas
Ministry: FINANCE
Asked by: JYOTI DHURVE

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF FINANCIAL SERVICES

## LOK SABHA

## UNSTARRED QUESTION NO. 1022 TO BE ANSWERED ON DECEMBER 4, 2015 / AGRAHAYANA 13, 1937 (SAKA) FOREIGN BANKS IN RURAL AREAS

## 1022.  SHRIMATI JYOTI DHURVE:

Will the Minister of FINANCE be pleased to state:

- (a) whether  the  Government  has  given  permission  to  foreign  banks  to  open  their branches in unbanked/rural areas in the country;
- (b) if so, the details thereof;
- (c) whether the  Government  has determined any policy to keep a check on these banks; and
- (d) if  so,  the  details  thereof  along  with  the  other  steps  taken/being  taken  by  the Government in this regard?

## ANSWER THE MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI JAYANT SINHA)

(a)  &  (b): Reserve  Bank  of  India  (RBI),  while  considering  applications  for  opening branches by foreign banks in India gives weightage to the nature and scope of banking facilities  provided  by  foreign  banks  to  common  persons,  particularly  in  under  banked areas, actual credit flow to the priority sector, pricing of products and overall efforts for promoting  financial  inclusion,  including  introduction  of  appropriate  new  products  and the enhanced use of technology for delivery of banking services.

As on November 30, 2015, 46 foreign banks are operating in India with 325 branches out of which 38 branches are in under banked areas.

Reserve  bank  of  India  has  issued  a  framework  for  setting  up  of  Wholly  Owned Subsidiaries (WOS) by foreign banks in India on November 6, 2013 in terms of which WOS would be permitted  to  open  branches  in  Tier  1  to  6  centres  (except  at  certain sensitive locations) without having the need to take prior permission from Reserve Bank of India in each case subject to reporting, as under:

- i) At  least  25  percent  of  the  total  number  of  branches  opened  during  the  financial year must  be  opened  in unbanked  rural  (Tier  5  and  Tier  6)  centres,  i.e.  centres which do not have a brick and mortar structure of any scheduled commercial bank for customer based banking transactions.
2. ii) The total number of branches opened in Tier 1 centres during the financial year cannot exceed the total number of branches opened in Tier 2 to 6 centres and all centres in the North Eastern States and Sikkim.
3. iii) An incentive in the form of a branch in a Tier 1 centre would be given for opening of a branch in Tier 2 to Tier 6 centres of under banked districts of under banked States.
4. iv) In  case  the  WOS  is  unable  to  open  all  the  branches  it  is  eligible  for  in  Tier  1 centres, it may carry-over (open) these branches during subsequent two years.
- v) If  for  some  reason  a  WOS is unable to  meet obligations of opening branches in Tier 2 to 6 centres in aggregate, or in unbanked rural centres (Tiers 5 to 6 centres) during the financial year, it must necessarily rectify the shortfall in the next financial year.
6. vi) This  general  permission  would  be  subject  to  compliance  with  the  parameters stated above as well as regulatory/supervisory comfort in respect of the individual WOS.  RBI  would  have  the  option  to  withhold  the  general  permission  to  banks which  fail  to  meet  the  above  mentioned  criteria  along  with  imposing  penal measures on banks which fail to meet the inclusion obligations above.

No WOS has been set up so far.

(c) & (d): Foreign banks are regulated largely on par with domestic banks under the provisions of Banking Regulation Act, 1949 and other regulations issued by RBI.

As per India's WTO commitment, license for new foreign banks may be denied when the maximum share of assets in India both on and off balance sheet of foreign banks' branches to total assets of the banking system exceeds 15%. Further, the scheme for setting up of WOS by foreign banks provides that restrictions would be placed on further entry of new WOSs of foreign banks, when the capital and reserves of the foreign banks (that  is,  WOSs  and  foreign  bank  branches)  in  India  exceed  20%  of  the  capital  and reserves  of  the  banking  system.  In  such  eventuality  prior  approval  of  RBI  will  be required for capital infusion into the existing WOSs of foreign banks. Also, in terms of the scheme for setting up of WOS by foreign banks, a foreign bank which has set up its presence in India through branch mode after August 2010, will be considered by RBI as being systemically important by virtue of the size of its business, that is, if its assets in Indian  books  (on  balance  sheet  and  credit  equivalent  of  off-balance  sheet  items) become 0.25% of the  total  assets  (inclusive  of  credit  equivalent  of  off-balance  sheet items) of all scheduled commercial banks and would be required to convert into a WOS.