UPSC Prelims 2024 Q49: RBI Rules for Foreign Bank Subsidiaries
With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:
1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: (d) Neither 1 nor 2
Statement-wise explanation
- 1: incorrect — RBI's 'Scheme for setting up of Wholly Owned Subsidiaries by foreign banks in India' (6 November 2013) sets a minimum. A new entrant's WOS must have initial paid-up voting equity capital of at least ₹5 billion (₹500 crore). An existing foreign bank branch that wants to convert into a WOS must have a minimum net worth of ₹5 billion. So a minimum capital requirement does exist.
- 2: incorrect — Under the 2013 framework, at least 50% of a WOS's directors must be Indian nationals, NRIs or PIOs taken together. The requirement that applies to Indian nationals resident in India is only at least one-third of the board. So the 50% floor does not apply to Indian nationals alone, as the statement claims. The framework also requires at least two-thirds non-executive directors and at least one-third independent directors.
How to eliminate
Statement 1 can be rejected from basic knowledge. Every new bank licence in India comes with an entry capital floor, so it is unlikely that RBI would let a foreign bank open a full local subsidiary with no minimum capital. A WOS gets near-national treatment, which makes a capital floor even more certain. The words 'no minimum' are an absolute claim, and absolute claims are usually traps. That narrows the answer to 'Statement 2 only' or 'Neither'. Statement 2 cannot be settled without the exact rule, and it sounds correct because '50%' does appear in the rule. The fact to remember: the 50% floor is for Indian nationals, NRIs and PIOs together, and only one-third of the board must be Indian nationals resident in India. UPSC changed 'Indian nationals/NRIs/PIOs' into 'Indian nationals', and that one change makes the statement wrong.
Know more
How foreign banks can operate in India
A foreign bank can enter India in two ways. It can open branches, which are part of the parent bank abroad. Or it can set up a wholly owned subsidiary (WOS), which is a separate company incorporated in India under RBI regulation. In its 2011 discussion paper and its 6 November 2013 scheme, RBI preferred the subsidiary model on financial-stability grounds. A locally incorporated bank's capital and assets stay in India, so they can be ring-fenced if the parent fails.
| Feature | WOS (2013 framework) |
|---|---|
| Minimum capital | ₹500 crore paid-up voting equity for new entrants; ₹500 crore net worth for converting branches |
| Board | ≥50% Indian nationals/NRIs/PIOs, of which ≥1/3 of the board must be Indian nationals resident in India; ≥2/3 non-executive; ≥1/3 independent |
| Priority sector lending | 40%, the same as domestic scheduled commercial banks |
| Branch expansion | Near-national treatment: can open branches like Indian banks, with RBI's prior approval needed only for some locations |
| Dilution | Parent may cut its stake to 74% or less under FDI policy; if it does, the WOS must be listed |
When a WOS is mandatory: RBI requires the WOS route for foreign banks with complex structures, banks that are not widely held, banks from countries with inadequate disclosure, and banks from countries whose winding-up laws give home depositors preference. A bank that started with branches must convert to a WOS once it becomes systemically important because of its balance-sheet size in India.
In practice: SBM Bank (India) Ltd began operating as a WOS on 1 December 2018. DBS Bank India Ltd followed on 1 March 2019. In each case, the parent's Indian branches were amalgamated into the new subsidiary.
NCERT Concepts to Revise
- Scheduled bank: A foreign bank's WOS is incorporated in India as a scheduled commercial bank, which is why RBI applies domestic-style capital and board norms to it.
- Financial sector reforms: RBI's rules for foreign bank entry, including the 2013 subsidiary scheme, grew out of the financial sector reforms that began in 1991.