Rating agency Fitch on Friday said the Reserve Bank's recent wholly-owned subsidiary (WOS) guidelines for foreign banks will not change the landscape of the Indian banking space but portend well for sector in the long run.
"As such, the recent rules are a good beginning - but insufficient, by themselves, to shake up the domestic banking landscape. But what it potentially signals is that further banking reforms - currently being considered - are not too far off," the agency said in a statement.
RBI has recently come out with detailed guidelines for subsidiarisation of domestic foreign banks.
WOS of foreign banks will now have considerable freedom to open branches, list on Indian exchanges and participate in domestic mergers & acquisitions, Fitch said.
In theory, it added, the norms ought to encourage existing large foreign banks to deepen business profiles in India.
"But regulatory treatment which is almost equivalent to that for domestic banks, will also create formidable challenges such as meeting priority sector lending (PSL) norms (40 per cent net bank credit) and maintaining at least 25 per cent of all new branches in unbanked centres," it added.
Foreign banks with 20 or more branches are anyway obliged to comply with the broad and sub-targets under PSL till 2017-18 financial year.
Moreover, Fitch said, meeting PSL guidelines may alter risk profiles and intensify competition in areas that are not traditional growth areas for foreign-owned entities - such as agribusiness (sub-limit of 18 per cent).
"It is not obvious that the recent framework will incentivise foreign banks to adopt the WOS model; but in the event they do, Fitch believes that such a step is likely to be driven by strategic reasons - as commercial reasons appear less compelling," the agency said.
The option of converting to subsidiaries was also made available during the first phase of India's foreign bank reforms between 2004-05 and 2008-09, although foreign banks refrained from exercising this option.
Fitch said large foreign banks that may ultimately opt for subsidiarisation could benefit over the longer-term and consolidate their presence.
But even then, limited capital headroom may pose future growth challenges, it said.
Foreign banks in India have a small but rising share of system assets. There are more than 40 foreign banks in India, of which the top three (Citibank, Standard Chartered and HSBC) account for over 60 per cent of the total foreign banking assets. All of these institutions operate at present through the branch format.