Subsidiary Norms for MNC Banks Soon: RBI Wholly-owned arms would make it easier for the central

bank to regulate MNC lenders OUR BUREAU MUMBAI The Reserve Bank of India may soon issue the final guidelines on subsidiarisation of foreign banks, more than seven years after it first signaled its intention to ask foreign lenders to incorporate their local units. In the road map on entry of foreign banks put forth in 2005, the RBI had offered foreign banks two choices to operate in the form of branches or as wholly-owned subsidiaries. But in the draft guidelines issued in 2011, the banking sector regulator proposed to make it mandatory for foreign banks entering India to set up their local units as wholly-owned subsidiaries, arguing that this would not only allow them to operate at par with local banks but also ring-fence the banking system from global risks. Choosing to operate as branches, most multinational banks have gone slow on conversion to avoid huge tax liabilities that come with operating as a wholly-owned subsidiary in India. From a policy perspective, we are into setting up wholly-owned subsidiaries for foreign banks, RBI deputy governor Anand Sinha said while speaking at a conference in Mumbai. When that happens, as per the discussion paper that we have issued, would be almost at par with the domestic banks in terms of almost everything, including branch expansion. Sinha, however, did not offer a timeline for issuing the guidelines. In June, RBI governor D Subbarao had said that the release of the guidelines was held up as the central bank awaited clearance from the government on some of the legal and taxation issues involved in mandatory subsidiarisation. We have not come to a final decision on the issue of subsidiary model to be followed by foreign banks due to some taxation and legal issues, Subbarao had said in a conference in Mumbai. Its not in the domain of the RBI, as taxation issues will be decided by the government.

 Operating as wholly-owned subsidiaries would make it easier for the RBI to regulate the multinational banks since they would have a separate board of directors and an asset-liability book, thus ring fencing their operations in the country from impact of parent banks operations. Wholly-owned subsidiaries of foreign banks will have to meet the financial inclusion objectives of the RBI like other local banks.

Home and car loans to cost more as PSU banks hike lending rates

State-run banks may not have formally raised their base lending rates despite a spike in market interest rates, but are charging even their marquee customers such as Housing Development Finance Corporation (HDFC) more, indicating that cost of home and car loans may rise.

With borrowers such as HDFC paying higher interest rates, bankers expect lending rates to firm up across the board as the Reserve Bank of India's recent monetary tightening measures begin to bite.

The nation's biggest mortgage lender, which was lent money by banks at base rate, is now contracting lines of credit at 50-75 basis points higher than base rates, said two persons familiar with the matter. HDFC may now be borrowing at 10.5% or 11%.

HDFC provides home loans in the range of 10.15% to 10.40% and if liquidity conditions continue to be tight, it may be forced to raise rates for its borrowers. Its subsidiary, HDFC Bank, the most profitable lender, has raised the base lending rate by 20 basis points to 9.80%. "Several banks signed contracts with HDFC to lend at rates ranging from 10.50% to 11% and on a condition that they cannot repay the loan within 90 days of availing it," said a

banker who did not want to be identified. "Since the finance minister does not want banks to raise lending rates, banks have raised the spread on base rate to prevent margins from shrinking."

State-run banks are torn between the need to raise interest rates to protect profit margins amid rising bad loans and the finance minister's desire that they should hold on to lending rates to revive the economy. So, banks are working out ways to circumvent the ministry's orders by charging higher than base rates. Base rate, an average of funding costs, is the rate at which banks cannot lend even to their best customers.

Nothing stops them from charging higher. "HDFC has tied up certain funds through lines of credit as in times like this, it is important to ensure that funds are available when needed," said a company spokesman.

"However, when we draw down the lines, we ensure that the funds are used for assets created on a matching basis with desired spreads. HDFC has a large and strong balance sheet and these amounts are relatively very small. More importantly, we will replace these lines as soon as rates come down as we have the right to do so."

 Banks are surreptitiously raising lending rates as their past lending binge is hurting them in the form of high bad loans as the economy slows to its worst in a decade, drawing warnings from rating companies.

"We believe banks' deteriorating asset quality and earnings could lead to negative rating actions," says Geeta Chugh of Standard & Poor's. "Government-owned banks are at greater risk of downgrades because they have a high share of corporate and small and medium enterprise loans, and relatively weaker risk management practices."

There are indications that the July 15 tightening by RBI and subsequent measures could last longer than many investors factored in as the Indian rupee hit a new low against the US dollar on Wednesday. This, some fear, will keep interest rates high since RBI has said it will keep money tight till the rupee stabilises. "Rates will come down in future, but not until such time as volatility in the exchange rate is contained," Governor Duvvuri Subbarao said.

The central bank's stance that currency stability is a precondition to roll back the tightening measures is making some believe the continued slide may make higher interest rates last a few quarters instead of a few days. "If it remains like this for long, it will translate into higher rates," says Shikha Sharma, MD & CEO, Axis Bank. Prolonged tightening would result in a rise in cost of funds for banks, she said.