In March 2026, the Reserve Bank of India imposed a monetary penalty of Rs 31.80 lakh on The Hongkong and Shanghai Banking Corporation Limited — HSBC — for non-compliance with directions on inoperative accounts and unclaimed deposits. The penalty order (RBI imposes monetary penalty on The Hongkong and S) was based on a statutory inspection with reference to the bank's financial position as on March 31, 2024. Seven months earlier, in October 2025, the RBI had penalised American Express Banking Corp Rs 31.80 lakh for non-compliance with the Credit Card and Debit Card — Issuance and Conduct Directions, 2022 (RBI imposes monetary penalty on American Express B). And in June 2024, Sonali Bank PLC — a Bangladeshi bank operating a branch in India — was penalised Rs 96.40 lakh for failures related to credit information reporting, KYC compliance, and SWIFT operational controls (RBI imposes monetary penalty on Sonali Bank PLC).
Three foreign banks, three different penalty orders, three different sets of regulatory failures. The penalties are modest by global banking standards. But they demonstrate a principle that foreign banks sometimes misunderstand: operating in India through a branch does not mean lighter regulation. The RBI applies the same supervisory framework — inspections, enforcement, penalties — to foreign bank branches as it does to domestic banks. The rules are sometimes different. The regulator is always the same.
See also: When the RBI Investigates Your Bank: The Complete Enforcement Chain | FDI Liberalisation in India: Sector Caps, Routes, Policy Evolution
Why does India allow foreign banks but with conditions?
India's approach to foreign bank entry is shaped by a combination of World Trade Organization commitments, financial stability concerns, and the history of foreign banking in India going back to the colonial era. When India joined the WTO and committed to liberalising financial services, it agreed to allow foreign bank branches — but with conditions on the number, location, and operations of those branches.
Why conditions? Because a foreign bank branch in India is legally an extension of the parent bank headquartered abroad. The branch does not have separate capital in India — its assets and liabilities are ultimately backed by the parent's balance sheet. If the parent bank fails or the home country enters a financial crisis, the Indian branch could be affected in ways the RBI cannot control. The conditions exist to manage this risk: ensuring that the foreign bank's presence in India is supervised, its operations are transparent, and its exit — if it happens — does not destabilise the domestic financial system.
The Master Circular on Establishment of Liaison / Branch / Project Offices in India by Foreign Entities, July 2010 RBI/2010-11/11 established the framework under which foreign entities — including banks — set up offices in India. The regulatory basis is Section 6(6) of the Foreign Exchange Management Act, 1999, read with FEMA Notification No. 22. This means foreign bank branch establishment is regulated under FEMA, not just the Banking Regulation Act. Why does this dual regulatory basis matter? Because it gives the RBI authority over both the banking operations and the foreign exchange aspects of a foreign bank's presence.
"Establishment of Branch/Liaison/Project Offices in India is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999." — Master Circular on Foreign Entity Offices, July 2010 RBI/2010-11/11
What is the difference between a branch and a wholly-owned subsidiary — and why does the RBI prefer one over the other?
Foreign banks in India operate primarily through two structures: branches and wholly-owned subsidiaries (WOS). Most large foreign banks — Citibank, Standard Chartered, HSBC, Deutsche Bank — have historically operated as branches. A few have incorporated Indian subsidiaries, and the RBI has encouraged this path.
Why does the RBI prefer subsidiaries? Because a subsidiary is a separate legal entity incorporated in India, with its own board, its own capital, and its own balance sheet. If the parent bank abroad faces a crisis, the Indian subsidiary's capital is ring-fenced — it cannot be repatriated to rescue the parent. The subsidiary's depositors are protected by Indian law, including DICGC deposit insurance. A branch, by contrast, is part of the parent's global entity. Its capital is "assigned" rather than separately incorporated. In a crisis scenario, the question of whether Indian depositors or the home country's creditors have first claim on the branch's assets becomes a cross-border legal dispute.
The Master Circular on Risk Management and Inter-Bank Dealings, July 2014 RBI/2014-15/12 covers risk management obligations that apply to both branches and subsidiaries of foreign banks. The Master Circular on Establishment of Liaison / Branch / Project Offices, March 2013 RBI/2012-13/7 updated the 2010 framework with additional conditions. The evolution shows the RBI progressively tightening the framework for branch operations while creating incentives for subsidiarisation.
Why have most foreign banks not converted to subsidiaries despite the RBI's preference? Because subsidiarisation has costs. A subsidiary must maintain its own capital adequacy — separate from the parent. It must comply with Indian corporate governance norms, including independent directors and board committees. It must file Indian tax returns as a separate entity. For a global bank that runs its India operations as a branch of the global entity, converting to a subsidiary means duplicating governance structures, allocating separate capital, and potentially losing the flexibility to move funds between India and the rest of the world.
"The Reserve Bank of India (RBI) has, by an order dated March 18, 2026, imposed a monetary penalty of ₹31.80 lakh on The Hongkong and Shanghai Banking Corporation Limited for non-compliance with certain directions issued by RBI on 'Inoperative Accounts / Unclaimed Deposits in Banks'." — HSBC Penalty Order, March 2026 (RBI imposes monetary penalty on The Hongkong and S)
How do priority sector lending requirements apply to foreign banks?
Every bank in India — domestic or foreign — must lend 40% of its Adjusted Net Bank Credit to priority sectors: agriculture, MSMEs, education, housing, social infrastructure, renewable energy, and others. The Master Directions on Priority Sector Lending, September 2020 RBI/2016-17/81 consolidated the PSL framework and applies to foreign banks.
But the sub-targets differ. Foreign banks with fewer than 20 branches in India have the same overall 40% target but different sub-category allocations. Why? Because these banks serve a fundamentally different market segment. A foreign bank with 12 branches concentrated in Mumbai, Delhi, and Bangalore is not positioned to lend to marginal farmers or self-help groups in rural India. Its clients are multinational corporations, large domestic firms, and high-net-worth individuals. Requiring it to meet the same agricultural sub-target as State Bank of India — which has 22,000 branches reaching into every district — would be impractical.
The practical mechanism for foreign banks to meet PSL targets when their lending profile does not naturally generate priority sector assets is the Priority Sector Lending Certificate (PSLC) system. Banks that exceed their PSL targets in specific categories can sell certificates to banks that fall short. Foreign banks are among the most active buyers of PSLCs. Why? Because buying a certificate is cheaper than originating small-ticket agricultural loans through a branch network they do not have.
The Graded Interest Rates on Deposits with SIDBI, December 2004 (Graded Interest Rates on Deposits with SIDBI in li) shows the older enforcement mechanism: banks that fell short of PSL targets had to deposit the shortfall amount with SIDBI or NABARD at below-market interest rates. This penalty mechanism — losing interest income on the shortfall — was the original incentive for compliance. The PSLC system, introduced later, provided a market-based alternative that benefits both the originator (who earns fee income from excess PSL) and the buyer (who achieves compliance without building rural infrastructure).
How does the RBI supervise foreign banks — and why do they get caught?
The RBI supervises foreign bank branches through the same Inspection-Supervision-Enforcement (ISE) cycle it uses for domestic banks. The statutory inspection — now called the Supervisory Evaluation — examines the bank's financial position, risk management, compliance, and governance at a reference date. The inspection team reviews documents, interviews management, and assesses compliance with every applicable direction.
The Sonali Bank penalty illustrates how this works. The June 2024 penalty order (RBI imposes monetary penalty on Sonali Bank PLC) found three distinct failures: contravention of the Credit Information Companies (Regulation) Act for not joining a CIC as required, non-compliance with KYC Directions, 2016, and failure to implement SWIFT operational controls. Three different regulatory domains — credit information, anti-money laundering, and cyber security — all failed at the same branch.
Why do foreign banks get caught on compliance issues that domestic banks often handle better? Several reasons. First, foreign bank branches in India are often small operations — Sonali Bank has a single branch — with limited compliance staff. A large domestic bank might have a dedicated KYC team, a separate SWIFT operations team, and a compliance department with dozens of specialists. A small foreign bank branch may have one compliance officer covering everything. Second, the parent bank's compliance culture may not align with Indian regulatory expectations. SWIFT controls that are considered adequate in Dhaka may not meet the RBI's standards, which were tightened after the 2016 Bangladesh Bank heist prompted a global review of SWIFT security.
"The Reserve Bank of India (RBI) has, by an order dated June 10, 2024, imposed a monetary penalty of ₹96.40 Lakh on Sonali Bank PLC for contravention of sub-section (1) of Section 15 of the Credit Information Companies (Regulation) Act, 2005." — Sonali Bank Penalty, June 2024 (RBI imposes monetary penalty on Sonali Bank PLC)
The American Express penalty tells a different story. The October 2025 order (RBI imposes monetary penalty on American Express B) was specifically for non-compliance with the Credit Card and Debit Card Issuance and Conduct Directions, 2022. American Express is not a small operation — it is a major global card issuer. The penalty shows that size and global reputation do not provide immunity from Indian regulatory enforcement. The inspection found non-compliance, the RBI issued a notice, the bank responded, and the penalty followed. The same process, regardless of whether the bank is Indian or foreign.
What are the capital requirements for foreign bank branches?
Foreign bank branches do not maintain "capital" in the same way an Indian-incorporated bank does. They maintain "assigned capital" — funds that the parent bank designates for the Indian branch's operations. The Master Circular on Exposure Norms, July 2015 RBI/2015-16/70 (since withdrawn) includes foreign bank branches in the exposure framework, with the assigned capital forming the base for calculating exposure limits.
Why is "assigned capital" different from equity capital? Because it is a liability of the branch to its parent, not permanent equity. The parent can, in theory, withdraw assigned capital — though doing so requires RBI approval. This structural difference is why the RBI applies additional safeguards to foreign bank branches: they must maintain assets in India sufficient to cover their Indian liabilities, and they cannot freely remit profits without complying with the Prudential Norms on Declaration of Dividends and Remittance of Profit Directions, 2025 (Reserve Bank of India (Commercial Banks – Prudenti).
The Draft Foreign Exchange Management (Establishment in India of a branch or office) Regulations, 2025 (Draft Foreign Exchange Management (Establishment i) released in October 2025 proposes to update the FEMA framework for foreign office establishment. The timing is significant — it comes as part of the broader November 2025 regulatory consolidation that replaced thousands of legacy circulars with entity-specific Master Directions. Why update now? Because the existing regulations, dating to 2000, did not account for new forms of foreign presence — fintech subsidiaries, representative offices of foreign payment processors, liaison offices of foreign insurance companies — that have emerged since FEMA was enacted.
What is the long-term direction for foreign banking in India?
The November 2023 establishment circular RBI/2020-21/69 on foreign law firms setting up offices in India shows how the framework extends beyond banks. The same FEMA provisions that govern foreign bank branches govern all foreign entity offices. The regulatory architecture treats "foreign presence" as a category, with banking being one type.
The number of foreign bank branches in India has remained relatively stable. The big global banks — HSBC, Standard Chartered, Citibank (which sold its consumer business), Deutsche Bank, Barclays — maintain their presence but have not expanded aggressively. Why? Because the Indian banking market has become intensely competitive. Large private sector banks — HDFC Bank (now merged with HDFC), ICICI Bank, Axis Bank — offer the same corporate banking services that foreign banks traditionally provided, often with better domestic networks and deeper relationships with Indian regulators.
"The Reserve Bank of India (RBI) has, by an order dated October 01, 2025, imposed a monetary penalty of ₹31.80 lakh on American Express Banking Corp. for non-compliance with certain directions of Reserve Bank of India (Credit Card and Debit Card - Issuance and Conduct) Directions, 2022." — American Express Penalty, October 2025 (RBI imposes monetary penalty on American Express B)
The future of foreign banking in India is not about branch counts. It is about the terms on which foreign banks participate in the Indian financial system — whether as branches, subsidiaries, or through new structures like IFSC Banking Units at GIFT City. The regulatory direction is clear: same standards, same supervision, same enforcement. The HSBC penalty for unclaimed deposits, the Sonali Bank penalty for KYC and SWIFT failures, the American Express penalty for credit card conduct violations — these are not isolated incidents. They are the RBI demonstrating that "foreign" is a descriptor of ownership, not of regulatory treatment. The rules may differ in specifics. The expectation of compliance does not.
Last updated: April 2026