RBI Grants In-Principle Approval To SMBC To Establish Wholly Owned Subsidiary

The Reserve Bank of India has presented an in-principle approval to Sumitomo Mitsui Banking Corporation (SMBC), Japan, for the establishment of a wholly owned subsidiary in India. The permission will allow the bank to convert its existing branch operations into a locally incorporated subsidiary.

SMBC currently operates through four branches located in New Delhi, Mumbai, Chennai, and Bengaluru. With the in-principle nod, the bank can move to a subsidiary structure subject to conditions laid down by the regulator. RBI will issue a final banking license only after it is satisfied that all requirements linked to the approval have been fulfilled.

What In-Principle Approval Means

An in-principle approval is not a full licence. It indicates that the regulator agrees in principle with the proposal but wants the applicant to fulfil certain requirements, typically related to capital, governance, compliance and operational readiness, within a specified period of time.

Only after satisfying these requirements, RBI will grant a licence under the Banking Regulation Act, 1949, for SMBC to start banking operations as a locally incorporated bank.

Why RBI Encourages Local Subsidiaries

RBI's guidelines on wholly owned subsidiaries are based on lessons drawn from the global financial crisis of 2008. The crisis underlined risks associated with complex cross-border structures of banking and the difficulty in managing the failure of big foreign banks operating through branches.

A subsidiary structure establishes a separate legal entity with a different capital base and board of directors that aids the better segregation of assets and liabilities of the local bank from its foreign parent. It also gives greater control to the local regulator, thereby enhancing protection given to depositors and creditors.

Key Eligibility Conditions for Approval

As per RBI's guidelines, foreign banks desiring to establish a wholly owned subsidiary need to fulfil several eligibility conditions. The Japanese megabank, SMBC, must obtain approval from its home country regulator and be subject to strong prudential supervision, including consolidated supervision in the home jurisdiction.

RBI also assesses the financial soundness of the parent bank, ownership structure, international presence, risk management systems and global credit ratings of the bank. These criteria are just minimum requirements, but the final decision remains with the regulator.

Capital and Governance Requirements

A wholly-owned subsidiary must have a minimum paid-up voting equity capital of Rs 500 crore. The capital must be brought in upfront through foreign exchange remittance from the parent bank.

Also, the subsidiary must comply with capital adequacy norms, including the Basel III requirements. During the first three years of operation, it has to maintain a minimum capital adequacy ratio of 10 per cent, which is higher than the standard Basel-III minimum.

The governance norms are also elaborate. At least half the board members should be Indian nationals, NRIs or persons of Indian origin, with one-third being resident Indians. The majority of the directors must be non-executive, while a proportion must be independent of the parent group. The subsidiary has to have a part-time non-executive chairperson as well as a full-time chief executive officer, with the prior approval of the RBI.

How the Shift will Impact Customers

The subsidiary structure, from a customer standpoint, is designed to provide greater stability and regulatory clarity. Because the subsidiary is locally incorporated, its operations are conducted fully within the ambit of domestic banking laws and regulations. It also makes it easier for the regulator to step in if required, and enhances depositor protection.

Customers may also find that, in practice, the subsidiary may be treated more like a domestic bank in matters such as branch expansion and participation in the local financial system. This may lead to wider access to banking services in due course, being subject to necessary regulatory approvals.

Priority Sector and Other Obligations

Wholly owned subsidiaries must follow the priority sector lending norms as applicable to other domestic banks. For foreign banks converting their branches to wholly-owned subsidiaries, RBI permits a phased approach, depending on the branch presence in different states.

What Comes Next

After in-principle approval, SMBC will have to fulfil all the conditions laid down before receiving the final licence. Once cleared, the conversion of branches into a wholly owned subsidiary will mark a structural change in how the bank would operate locally and align more with the RBI's long-term regulatory framework designed for foreign banks.