Foreign banks planning to enter India through the subsidiary route and finding the restrictions on branch expansion a stumbling block may breathe a sigh of relief - they will not be subject to the Reserve Bank of India's (RBI) priority sector lending and rural presence guidelines, till such time that the policy on their branch expansion is on a par with that for local banks.

The RBI, in its guidelines on foreign banks' India exposure released on February 28, had stated that the wholly owned subsidiaries would not be treated on a par with the existing branches of foreign banks for branch expansion in India. The guidelines state that RBI may prescribe market access and national treatment limitation consistent with World Trade Organisation guidelines, as also other appropriate limitations to the operations of wholly owned subsidiaries consistent with international practices and the country's requirements.

Going by the WTO norms, at least 12 new branches for foreign banks need to get the regulator's nod in a year. The number of branches permitted each year has already been higher than India's WTO commitments. However, foreign banks will not be allowed unbridled expansion of their branches. Since they will not be allowed to expand freely, it is only natural that foreign banks taking the subsidiary route will not be subjected to rural branch norms as well as priority sector lending.

Under the existing rules, a fourth of a bank's branch network needs to be based in rural India. In line with the priority sector guidelines, a domestic bank needs to allocate 40 per cent of credit to the small scale, agriculture and other sectors.

Foreign banks are allowed to treat export credit as part of their priority sector lending. Since they would not be given freedom to expand their branch network, they would continue to treat exports as part of priority sector lending. The RBI, however, has proposed to adopt a more liberalised policy in foreign banks' branch expansion in "unbanked areas".