With reference to the rule/rules imposed by the Reserve Bank of India

With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:

There is no minimum capital requirement for wholly owned banking subsidiaries in India.
For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.

Which of the statements given above is/are correct ?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

Answer is Right!

Answer is Wrong!

This question was previously asked in

UPSC IAS – 2024

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The question concerns the rules imposed by the Reserve Bank of India (RBI) on foreign banks setting up operations in India, specifically regarding Wholly Owned Subsidiaries (WOS). Let’s evaluate the statements:
Statement 1: “There is no minimum capital requirement for wholly owned banking subsidiaries in India.” This statement is incorrect. RBI guidelines require foreign banks operating as WOS in India to maintain a minimum initial assigned capital (net worth) of ₹500 crore.
Statement 2: “For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.” This statement is correct. RBI guidelines for WOS stipulate that a majority of the board members (i.e., at least 50%) should be Indian nationals, and the Chairperson of the board should be an Indian national resident in India.
Therefore, only statement 2 is correct.

RBI permits foreign banks to operate in India through branches or by setting up Wholly Owned Subsidiaries (WOS). The WOS model is generally preferred by RBI as it provides greater regulatory oversight and ring-fences the Indian operations from potential problems faced by the parent entity abroad. Specific guidelines are in place for WOS regarding capital requirements, governance, priority sector lending, and branching.

The policy for WOS of foreign banks was introduced by the RBI to allow foreign banks greater flexibility in expanding their branch network in India compared to the restrictions faced by foreign bank branches. WOS are treated on par with domestic banks in terms of branching rules, although they have specific requirements regarding capital, governance, and prudential norms. The requirement for a majority of Indian directors is aimed at ensuring local understanding and responsiveness to the Indian market and regulatory environment.

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