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In this article, we would discuss why some Indian banks have been ordered to inject funds into UK subsidiaries.

As per a recent regulation of the Bank of England’s (BoE) Prudential
Regulation Authority (PRA), some of the major Indian banks have to pump in several
million pounds to fund new UK subsidiaries to house their retail banking
operations.

According to the report published in UK’s Financial Times, the new
norms are a result of the central bank’s concern that depositors in the UK
could lose huge amounts of money if a foreign bank goes bankrupt and its home
regulator chose to give priority to domestic depositors.

The PRA will order a total of 50 strong overseas lenders with
branches in the UK to comply with the new norms. The list includes banks from
Asia and the Middle East. BoE will consider the size of the foreign bank’s
retail operations in the UK and ability of its home country to deal with a major
breakdown in the banking system.

Reasons that led to
the regulation

The adverse effects of the 2008 financial crisis is the main
reason for the implementation of the new norms. Post the crisis, BoE had to
compensate its depositors who had their savings deposited in Icelandic banks
that became insolvent.

Indian lenders on the
list

India’s largest public sector lender, State Bank of India
(SBI), and Bank of Baroda are among those banks that are obligated to implement
the new norms. The bank will reportedly infuse around $300 million to
capitalise the new subsidiary that it is expected to come up by 2017 to house retail
operations, which has 10 branches and customer deposits to the tune of $2.5
billion.

Sanjiv Chadha, the UK head of SBI has stated that though the
new norms will prove to be burdensome, it is not discriminatory.

He said that the additional tasks of setting up an independent
board for the new subsidiary would impede faster growth that has been achieved
in SBI’s wholesale banking operations in the UK.

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