Q49 (IAS/2024) Economy › Money, Banking & Inflation › Banking structure Official Key

With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements : 1. There is no minimum capital requirement for wholly owned banking subsidiaries in India. 2. 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 ?

Result

Your answer: — · Correct: D

Explanation

The correct answer is option D (Neither 1 nor 2) because both statements are incorrect.

**Statement 1 is incorrect:** The WOS (Wholly Owned Subsidiaries) will have a minimum capital requirement of Rs. 300[1] crore, i.e., Rs 3 billion. WOS of foreign banks would be treated at par with the new private sector banks in regard to minimum capital requirement (i.e. initial minimum capital of Rs.300 crore)[2]. Therefore, there is indeed a minimum capital requirement, not none as the statement claims.

**Statement 2 is also incorrect:** Not less than 50 per cent of the directors should be Indian nationals resident in India[3]. More specifically, a minimum of 50% of directors must be Indian Nationals/NRIs/PIOs, with at least one-third being resident Indian Nationals[4]. The statement's requirement is subtly different - it requires at least 50% to be Indian nationals (implying resident), but the actual rule allows Indian Nationals/NRIs/PIOs to constitute 50%, with only one-third needing to be resident Indian nationals.

Since both statements are incorrect, the answer is option D.

Sources

[1] https://dea.gov.in/files/annual_reports_documents/AR_ENGLISH.pdf
[2] https://wtocentre.iift.ac.in/CBP/FDI%20Policy%20in%20Banking_Shri%20Shashank%20Saxena.pdf
[3] https://rbi.org.in/upload/content/images/Annexure.html

How others answered

Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.

Community Performance

Out of everyone who attempted this question.

35%

got it right

Web / Current Affairs

Online pages / news items supporting the statement

Web source

Presence: 5/5

"The WOS will have a minimum capital requirement of Rs. 300 crore, i.e., Rs 3 billion"

Why this source?

Explicitly states the minimum capital requirement for WOS of foreign banks.
Gives the amount both in rupees and in words (Rs. 300 crore = Rs 3 billion), directly answering the question.

Web source

Presence: 4/5

"WOS of foreign banks would be treated at par with the new private sector banks in regard to minimum capital requirement (i.e. initial minimum capital of Rs.300 crore)"

Why this source?

Treats WOS of foreign banks at par with new private sector banks regarding minimum capital.
Specifies the initial minimum capital as Rs. 300 crore.

Indirect textbook clues (5)

How books hint at the answer

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2 Money and Banking- Part I > p. 94

Strength: 5/5

“In India RBI has kept Capital Adequacy Requirement of 11.5% (including 2.5% capital conservation buffer). • Tier 1 Capital (Equity and Equity like capital) = 7%: Tier 2 Capital (Bonds); Col2: = 2% • Tier 1 Capital (Equity and Equity like capital) = 7%: Capital Conservation Buffer (Equity capital); Col2: = 2.5% • Tier 1 Capital (Equity and Equity like capital) = 7%: Minimum Total capital requirement; Col2: = 11.5%”

Why relevant

States RBI's current overall minimum capital adequacy requirement under Basel III: total capital 11.5% (including 2.5% conservation buffer and Tier‑1 7%).

How to extend

A student could use this as a baseline regulatory minimum to compare against any specific subsidiary paid‑up capital or capital‑adequacy floor the RBI might set for foreign bank subsidiaries.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2 Money and Banking- Part I > p. 95

Strength: 4/5

“Scheduled Commercial Banks have achieved the minimum Basel III capital requirement. The higher the capital is above the regulatory minimum, the greater the freedom banks have to make loans. The closer bank capital is to the minimum, the less inclined banks are to lend. If capital falls below the regulatory minimum, banks cannot lend or face restrictions on lending. When loans go bad and turn into non-performing assets (NPAs) banks have to make provisions for potential losses (i.e., banks are required to keep certain funds in reserve which they can't lend and is called provisioning against NPAs). This tends to erode bank capital and put brakes on loan growth.”

Why relevant

Notes that Scheduled Commercial Banks have to meet the minimum Basel III capital requirement and that falling below regulatory minima restricts lending.

How to extend

One could infer that RBI expects entities operating as SCBs in India (including subsidiaries) to meet Basel III minima, so look for any additional RBI rule that adds a numeric subsidiary floor on top of Basel minima.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > Basel-I Norms > p. 234

Strength: 4/5

“• In 1988, the Basel Committee on Banking Supervision (BCBS) introduced a capital measurement system called Basel Capital Accord, also known as Basel-I. • It focused only on credit risk. • It prescribed minimum capital requirement at 8 per cent of the Risk Weighted Assets (RWA) for banks. • India adopted Basel-I norms in the year 1999. Under Basel-I, the RBI issued guidelines to maintain a CRAR (Capital to Risk Assets Ratio) or CAR (Capital Adequacy Ratio) of 9 per cent by every SCB. CRAR - It is defined as the proportion of bank's total risk-weighted assets that are held in the form of shareholders' equity and certain other defined class of capital.”

Why relevant

Gives historical context: Basel accords set minimum capital ratios (Basel I: 8% RWA; India applied CRAR norms and earlier RBI guidance set CRAR targets).

How to extend

Use this pattern (Basel norms -> RBI adoption -> possible higher domestic floors) to suspect RBI might specify either a ratio or a paid‑up capital amount for foreign subsidiaries; check which form (ratio vs absolute amount) is used.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Criteria for Recognition as Scheduled Commercial Bank > p. 175

Strength: 3/5

“• It should have paid-up capital and reserves of not less than ₹5 lakh, and • It should satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors. Banks not listed under this Schedule are called Non-Scheduled Banks. In India, all banks are Scheduled banks except for few Local Area Banks (LABs) and few Urban Co-operative Banks (UCBs). SCBs in India are categorised into five different groups as follows: • State Bank of India • \overline{2}. Nationalised Banks • Indian Private Banks • Private Sector Foreign Banks • 5. Regional Rural Banks”

Why relevant

Provides an example of an absolute paid‑up capital threshold used in Indian bank regulation (₹5 lakh) for recognition as a scheduled bank.

How to extend

A student could reason RBI sometimes uses absolute capital amounts in rules, so they should check whether the subsidiary requirement is an absolute paid‑up capital figure (like this example) rather than only a capital‑adequacy ratio.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > 24. Private Sector Foreign Banks > p. 178

Strength: 3/5

“RBI, in 2005, released a first-ever document for the presence of Foreign Banks in India. Foreign Banks that desire to open a branch in India need to apply to RBI stating all the details about their shareholders' financial position, etc. Most of the Foreign Banks are focussed on trade finance, external commercial borrowings, wholesale lending, investment banking and treasury services. Examples of Private Sector Foreign Banks include CitiBank, HSBC, Deutsche Bank, American Express, etc.”

Why relevant

Describes RBI’s regulatory oversight of foreign banks seeking presence in India and that applicants must disclose shareholders' financial position.

How to extend

This indicates RBI imposes entry/structural conditions on foreign banks — prompting a search for a specific RBI circular or guideline that lays out a minimum capital requirement for wholly owned subsidiaries.

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With reference to the governance of public sector banking in India, consider the following statements : 1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade. 2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected. Which of the statements given above is/are correct ?

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