RBI/2008-09/302
DBOD.No.BP.BC.89 /21.04.141/2008-09
December 1, 2008
All Scheduled Commercial Banks
(excluding Local Area Banks and Regional Rural Banks)
Dear Sir,
Operations of foreign branches and subsidiaries of the Indian banks
Compliance with statutory/regulatory/administrative prohibitions/ restrictions
As you are aware, the banking operations carried out by the Indian banks are
fully subject to various statutory and regulatory prohibitions and restrictions
in force in India from time to time. The issue of applicability of these
prohibitions / restrictions to the operations of foreign branches and
subsidiaries of the Indian banks had arisen, and the matter has been examined by
us. The position is clarified as under.
- Section 5(b) of the Banking Regulation Act (B R Act), 1949 defines the
business of banking and Section 6 (1) lays down the various forms of business
which the banking companies can engage in. These Sections are also applicable to
the public sector banks by virtue of a specific mention thereof in their
respective statutes. Further, in terms of Section 19(1) of the B R Act, a bank
can form a subsidiary company only for (i) undertaking an activity which is
permitted to the parent bank itself under Section 6(1), ibid; (ii) carrying out
the business of banking exclusively outside India; and (iii) undertaking such
other business, considered conducive to the spread of banking in India, that the
RBI may permit in public interest. This Section too is applicable to the public
sector banks by virtues of the provisions of Section 51 of the B R Act.
- In the course of operations of the Indian banks’ branches and subsidiaries
abroad, it is possible that while complying with the host-country regulatory
requirements in certain jurisdictions, they might be required to undertake an
activity which is not permitted under the B R Act / the respective statute of
the public sector bank. In such circumstances, the banks are advised to ensure
that they obtain from the RBI / Government of India necessary permission under
Section 6 (1) (m) or 19 (1) (c), as the case may be, for undertaking such
activities.
- As regards transacting, by the foreign branches / foreign subsidiaries, in
financial products which are not available in the Indian market and on which no
specific prohibition has been currently placed by the RBI, no prior approval of
the RBI would be required for the purpose provided these are merely
plain-vanilla financial products. Banks should, however, ensure that their
foreign branches / subsidiaries, dealing with such products in foreign
jurisdictions, have adequate knowledge, understanding, and risk management
capability for handling such products. Such products should also be
appropriately captured and reported in the extant off-site returns furnished to
the RBI. These products would also attract the prudential norms such as capital
adequacy, credit exposure, periodical valuation, and all other applicable norms.
In case the current RBI norms do not specify prudential treatment of such
financial products, it would be incumbent upon the banks to seek specific RBI
guidance in the matter.
- If, however, the foreign branches / foreign subsidiaries of the Indian banks
propose to handle structured financial products, banks should obtain prior
approval of the RBI for the purpose by furnishing full particulars of these
products including their regulatory treatment prescribed by the host-country
regulators (for capital adequacy, valuation, pricing, exposure norms, etc), as
also the risk management systems in place in the branch / subsidiary to deal
with such products.
Yours faithfully,
(Prashant Saran)
Chief General Manager-in-Charge