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RBI may review foreign bank capital norms

George Smith Alexander & Freny Patel

The Reserve Bank of India may review the capital norms for foreign commercial banks. This follows a slew of foreign banks taking a relook at their operations in the country.

The RBI had earlier said foreign banks' exposure to Indian corporates through the external commercial borrowings route should be excluded from their capital, with effect from March 31, 2002.

This condition will mean that foreign banks can no longer take these loans as capital in their Indian books. But if they wanted to maintain the Indian books at current levels or to expand the asset base, they would have to bring in fresh equity capital.

According to sources, if the exposure through the ECBs are taken into consideration, the foreign banks have been lending up to an average of 40 per cent of the capital funds in India.

Since the RBI has capped the exposure to a single corporate at 15 per cent, down from the earlier level of 20 per cent, some of the foreign banks will be required to drastically cut the exposure limits.

"It would be bad for the country... should foreign banks choose to pare their operations on account of the new norms, especially as it comes in the wake of the Enron fiasco. Though some of these banks have relatively small operations in India, they act as ambassadors of their country," said a senior foreign banker.

"There is going to be a compromise. The RBI may dilute the move and give the banks a few years to bring in more capital," pointed out a foreign banking source familiar with the development.

Going by the present norms, a foreign bank with a one-branch operation is required to bring in around $10 million and a further $5 million for the second branch.

The RBI has also indicated that it is willing to review the new norms in the area of prudential lending as well. "While most foreign banks are comfortable in terms of meeting the capital adequacy norms (10 per cent by March 2002), the corporate lending norm is the main issue that needs to be addressed," said another foreign bank official.

In the April 2001 credit policy, the RBI had barred foreign banks from including their external commercial lending to Indian corporates as part of the tier I capital.

The new norms, once implemented, will force foreign banks either to infuse fresh capital from overseas to maintain the capital adequacy ratio or pare their asset base.

According to the existing RBI regulations, foreign banks are not allowed to raise funds from the local market in the form of tier II capital.

They are required to bring in funds in conformity with the number of branches opened in the country. According to the International Chambers of Commerce, should any branch default, the head-quarters/parent will be responsible to make up the shortfall.

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