RBI seeks one-time tax relief to arm MNC banks

The Reserve Bank of India has sought a one-off tax exemption from the government for foreign banks that convert into local subsidiaries as it intensifies efforts to ring-fence the domestic financial system from global shocks.

The permission, if granted by the government that's already facing widening fiscal gap, may lead to thousands of crores of notional revenue loss.

"It is likely that the foreign banks which have attained a particular asset size may be asked to convert into wholly-owned subsidiaries. RBI is also expected to extend the branch licensing policy applicable for domestic banks to foreign banks. Like domestic banks, they would have to ensure that at least 25% of their branches are in unbanked rural centres," said a banker, familiar with the proposal.

Currently, it's not very easy for foreign banks to acquire branch licences from the regulator. On an average, the central bank issues about 14 branches to all foreign banks every year. Along with the national treatment, sources indicate that foreign banks would have to meet the 40% priority sector target.

At present, the priority sector limit for foreign banks is pegged at 32% against the 40% target set for domestic banks. Foreign bankers had asked RBI to consider relaxation in mandated farm lending targets, considering their limited reach.

"The central bank, along with the Indian Banks' Association, is relooking at the definition of priority sector, which should address foreign banks' problems. Hence, this should not be a show stopper any more," said a person familiar with the proposal.

"RBI has suggested that the government evaluate extending one-time tax relief to foreign banks that migrate to the wholly-owned subsidiary model," he said. Under tax rules, a branch of a foreign bank in India is treated as a foreign firm.

If a foreign bank chooses to convert into a subsidiary, it will have to transfer the business of the branches to the unit, requiring the parent to pay capital gains tax for the transaction. There are 34 foreign banks operating in India as branches, accounting for 7.65% of the total banking assets as on March 2010, up from 9.03% a year ago.

If the credit equivalent of balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%. Share in aggregate deposits and credit in December 2010 was 4.8% and 5.1%, respectively.

Source: Economic Times