Measures and Guidelines for Foreign Banks: New foreign banks are allowed to conduct business in India after

taking into consideration the financial soundness of the bank, international and home country ranking, rating, international presence, and economic and political relations between the countries. India issues a single class banking license to foreign banks and does not require them to graduate from a lower to a higher category of banking license over a number of years. This single class of license places them virtually on the same footing as an Indian bank and does not place any restrictions on the scope of their operations. Thus, a foreign bank can undertake, from the very first day of its operations, any or all of the activities permitted to an Indian bank and all foreign banks can carry on both retail as well as wholesale banking business. A priority sector obligation of foreign banks is presently at 32% of their total advances. Priority sector consists of agriculture, small businesses and Export loans (part of priority sector loans only for foreign banks). To meet their quarterly and yearly targets, foreign banks adjust the rates drastically and lend at a much cheaper rate to the medium and small enterprises and exporters. The capital requirement for a foreign bank to open a branch in India is $25 million (around Rs117 crore). India had committed to the World Trade Organization (WTO) in 1997 to give 12 new branch licenses to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms). Minister of state for finance, Namo Narain Meena, had told the Rajya Sabha on August 9 that RBI was processing applications from 18 foreign banks for opening maiden branch or representative offices. As on June 30, there are more than 300 foreign bank branches in the country.

Under the roadmap for foreign banks released by the RBI in 2005, branches of foreign banks were allowed to convert into wholly-owned subsidiaries (WOSs). The roadmap was divided into two phases, the first phase spanning the period March 2005 - March 2009, and the second phase beginning after a review of the experience gained in the first phase. The first track was the consolidation of the domestic banking system, both in the private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronized manner. Foreign banks already operating in India were also allowed to convert their existing branches to WOS while following the one-mode presence criterion. The WOS is to be treated at par with the existing branches of foreign banks for branch expansion in India. No foreign bank, however, applied to establish itself as a WOS or to convert to a WOS during the first phase. Reason may be, once they become subsidiaries of overseas parent, they should have separate balance sheets and their capital will be treated separately.

Compensation Guidelines to Foreign Banks: Till July 1, 2010 the salaries of top executives in private and foreign banks are approved by the central bank after the respective banks board gives a go-ahead to the proposal. In the G-20 meet last year, the world leaders expressed concern over the high compensation packages of top bank executives, which, they argued was a not positive sign in a healthy financial system. With a view to align the compensation with long-term value creation, the G-20 leaders asked the central banks to formulate compensation policies. However, each country will have to come out with its own rules. The agreements reached at the G20 summit discourage bonus guarantees extending more than a year. Besides, the bonuses should be linked to the CEOs individual contribution and performance in the organization. In this background, RBI issued guidelines to foreign banks on sound compensation policy. Foreign Banks would be required to submit a declaration annually from their Head Offices to the effect that their compensation structure in India, including that of CEOs is in conformity with the Financial Stability Board (FSB) principles and standards. RBI would take this into account while according approval of CEOs compensation. In case it is observed that compensation is not properly aligned to risks or

there are other regulatory and supervisory compliance issues in relation to the Indian operations, the compensation issue would be appropriately taken up with the RBI, on case to case basis. RBI is keen on local incorporation & listing on local bourses as it wants to ring-fence foreign banks in India play from their global operations. The foreign parent now can take the money outif their global balance sheet needs itfrom an Indian branch, but cannot do so when the branch becomes an Indian subsidiary.

The RBI has made it clear that the acquisition by foreigners of shareholding in Indian private sector banks can only relate to certain much specified banks that are in very bad shape already. The guidelines state that In order to allow Indian Banks sufficient time to prepare themselves for global competition, initially entry of foreign banks will be permitted only in private sector banks that are identified by RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a phased manner.Therefore, as on 2009, foreign acquisition of Indian banks, subject to the overall investment limit of 74 per cent, is to be limited to those that are anyway about to collapse and have been vetted by the RBI for restructuring.

The Reserve Bank of India (RBI) has decided to run a detailed assessment of the riskmanagement capabilities and evaluate the transparency in financial affairs of all foreign banks operating in India. The move is aimed at ensuring they do not pose any systemic risk to the banking sector. Till this process is completed, foreign banks are unlikely to be allowed to open more branches in the country. The present inspection system under RBS for foreign banks is based on Capital Adequacy, Asset Quality, Liquidity, Compliance and Systems (CALCS)

As the FDI policy document issued by the GOI, FDI up to 74% from all sources will be permitted in foreign banks on the automatic route, subject to conformity with the guidelines issued by RBI from time to time.

Deduction in case of foreign banks, having branches in India, for Head Office expenses (currently available at 5% of adjusted total income or attributable HO expenses whichever is lower) now proposed to be 0.5% of total sales/ turnover/ gross receipts under the provision of DTC Bill 2010.

The DTC Bill 2010 proposes to do away with the deduction for provision for bad and doubtful debts (PDD) with reference to the advances by rural branches as well as with reference to a percentage of total income. Instead the deduction would be available on the entire advances at a rate of 1%. The Code mandates that trade debt written off as irrecoverable should be debited to PDD account. Hence, a view could emerge that in case of debts written off without being 'provided for', no deduction may be allowed.

The DTC Bill 2010 provides an income-tax rate of 30% for banks and the effective income-tax rate for a branch of the foreign bank would be 40.5% as branch profit tax (BPT) would be levied at 15% on the branch profits after reducing the income-tax paid from such profits.

If an overseas bank has taken a loan outside India and then onwards lent this amount to an Indian corporate (for permissible purposes), the interest paid by the overseas bank to the ultimate overseas lender should not be taxable in India, unless the overseas bank claims such interest as a deduction from its income in India.

No restrictions have been placed on establishment of non-banking financial subsidiaries (NBFCs) in India by the foreign banks or of their group companies. Unlike banks, where RBI gives not more than two to three branch licenses, there are no such restrictions on NBFCs. RBI has been concerned that foreign banks were using a combination of the banking and NBFC license to defeat the purpose of branch licensing and was, therefore, going slow on these licenses. In November 2006, the Reserve Bank of India not only disallowed banks from holding 5% of the equity of any NBFC; it also limited any bank's credit exposure to all NBFCs to 40% of the bank's net worth.

Deposit insurance cover is uniformly available to all foreign banks at a nondiscriminatory rate of premium.

Advantages of Foreign Banks

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Foreign Banks & Private Banks cover 65% of the foreign exchange transactions in India. Foreign banks have considerable international exposure and can launch new products (e.g., ATM, credit card, etc) besides providing better services. Foreign banks are also going to dominate the highly lucrative trade-related businesses.

Some international banks even provide lifestyle benefits such as access to exclusive clubs, concierge services and leisure activities to their customers in India.

Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accretive.

With Indian firms increasingly looking for investments overseas, foreign banks will play a critical role in raising money for them, connecting them with a global clientele and consumers.

Disadvantages
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They have limited number of branches. Lending habits of foreign banks are not so prudential and healthy outside India. If the parent banks don't survive, the foreign banks in India will not be able to survive here.

The function like Electronic transfer is offered by these banks to other banks, but there is no way to know who has sent the amount.

Foreign banks charge higher fees from customers for providing banking services and also, maintaining a bank account requires substantial financial resources. In rural areas if they ask depositors to keep a minimum balance of Rs10, 000 or more in their accounts most of them cannot afford it as is a princely sum by the Indian income standards which only affluent customers can afford.

Big foreign banks are not going to lend money to small and medium-sized enterprises (SMEs), small traders, informal sector and farmers. They tend to serve less risky businesses such as PSUs and big corporate groups. This has serious consequences for economic growth.

As the consumer level, foreign banks have a bias towards providing services to wealthy and affluent customers in the developing world. The up market retail business is the primary focus of foreign banks in most developing countries. For instance, consumer retail loans (which are also the riskier) are the fastest growing financial services market in India. The poor and middle class households and the rural sector are not the attention of foreign banks.

Foreign banks tend to follow exclusive banking by offering services to a small number of clients, instead of inclusive banking, given the fact that the average private banking customer can be ten times more profitable than the average mass-market retail customer.

It is highly unlikely that the commercial interests of foreign banks would match with the developmental needs of unbanked regions of India.

RBI Moves: Various measures taken by the RBI after 1991 once Financial Sector Reforms introduced were: (1) Disclosures and transparency in Balance Sheet (2) Capital Adequacy requirements (3) 4-way classification of Assets (Loans and Investments) (4) Gradual reduction of SLR (from 39-25) and CRR (From 15-4.5) stipulations (5) Provisioning Norms (like provision for NPA, etc) (6) Deregulation of Interest Rates (7) Creation of Debt Recovery Tribunals, Board for Industrial & financial Reconstruction (BIFR) (8) Enactment of new laws or amendments to Negotiable Instruments Act, and others by Government (9) Implementation of Asset Liability Management (ALM) measures and Basel norms (10) Introduction of Risk Management in Banks and Risk Based Supervision (RBS) -

CAMELS (11) Recovery measures like Compromise Settlements, Corporate Debt Restructuring,

Rehabilitation facilities to sick units

(12) (13) (14) (15) (16)

Computerization of branches Closure or shifting or combining of loss making branches Voluntary Retirement Scheme for employees Investment in Hardware, Software and training of staff Permission for Online Banking, Internet Banking, ATMs, etc.

All these measures have definitely aided in reduction of costs, improving productivity and profitability of banks, strengthening of capital and funds base of banks, reduction of multi- tier decision making levels, speedier collection and transfer of funds, investor education and information dissemination through use of Internet, offering innovative products and services, spread of banking habits among all sections of society, competition with foreign and new generation private sector banks, etc. Customer is now seriously considered as king and all efforts are being made to suit his needs and meet the demands by tailoring various products and services.