Are foreign banks operating in India safe for consumers?

Question

This question is about the safety of foreign banks operating in India. I don't know how much people who are not familiar with Indian finance systems will be able to tell me, but I think it is on topic for the site.

I'll first give some background to set the question in context. India has, roughly speaking, four classes of banks. These are government-owned Indian banks, private Indian banks, cooperative Indian banks, and foreign banks with branches in India. For simplicity, and because it doesn't really matter for the purpose of this discussion, I'm lumping government-owned foreign banks and private foreign banks together.

Like many things in India, the Indian banking system is not exactly functional. In particular, the deposit insurance per account was, until recently, Rs. 100,000 (one lakh) - which is roughly equal to USD 1,306 at the current exchange rates. It was recently increased to 5 lakh INR (approx. USD 6,532) because of the PMC bank collapse (more about PMC in a bit). 5 lakh Rupees is not a lot of money even in India. The upshot is that India does not have adequate deposit insurance, which leaves depositors wide open to the consequences of bank collapses and the like.

Another relevant thing to note is that the Reserve Bank of India (RBI) has a list of Too Big To Fail banks, which last I checked, includes SBI (the largest govt bank), and HDFC and ICICI (the two largest private banks). So, for this reason, as well as others, these banks are probably as safe anything in India. For reference, This is a reasonably current list of the largest Indian banks.

Also, the general stability of the Indian banking system is unclear, but may be deteriorating. I'm not sufficiently knowledgable on the topic to venture an assessment.

Of these four categories, government-owned Indian banks are almost certainly the safest, in the sense that a government-owned Indian banks is very unlikely to collapse. I believe such a thing has never happened in the history of independent India. Not because they are well run, because they are often not. It's because if they run into trouble, the govt bails them out with taxpayer money, often in secret. However, government-owned Indian banks are not a great choice. They have staggeringly bad customer service, and are really unpleasant to deal with, which is a significant problem.

Secondly, there are private Indian banks. It's not clear whether these are safe, but it seems that the Indian govt has intervened to bail them out in the past, at least if they are large enough. A recent example is Yes Bank in 2020.

Thirdly, there are cooperative banks. These are a specifically Indian thing. They superficially resemble community banks, like co-ops or credit unions, but are not. They are very definitely not safe, and in a safe banking system would not exist in their current form. Most Indian banks are cooperative banks. They are fairly small, and there are many of them. I was not aware of this until recently, but many cooperative banks fail, and apparently nobody notices or cares. Mostly it doesn't even make the news. Commonly, what happens is that the RBI freezes the bank in a sort of zombie state, and the bank can remain in that state for many years. On 23 September 2019, one of the largest cooperative banks in India (137 branches across India), Punjab and Maharashtra Cooperative Bank, unexpectedly collapsed, leaving several hundred thousand people (numbers are unclear), without their money. This happened because the management was committing major fraud for years and hiding it from oversight, including the oversight of the RBI. Then someone blew the whistle, and the RBI shut it down. The current situation is that depositors can withdraw at most Rs. 50,000 of their own money, plus a bit more if they can justify an emergency. And other than some occasional reassuring noises from the Reserve Bank, the govt has otherwise ignored the situation. This is as horrific as it sounds.

The final category is what my question is about. If a foreign bank has branches in India, it's not clear to me how safe those branches would be to bank in. Some example of foreign banks that have a significant presence in India are Standard Chartered, Citibank, and HSBC. I have and have had accounts in various private banks in the past. It's a relatively popular option in my location, though not in India at large. I'm now wondering if this is safe. Each of Standard Chartered, Citibank, and HSBC are very large banks in their own right, and I think they are safe, in that they are so large that they would be likely to be bailed out for the usual "too big too fail" reason. But this may not apply to their presence in India.

Foreign banks in India offer the same deposit insurance as all other Indian banks do, even though they will often offer much higher insurance levels in other countries. This may be a condition of the RBI allowing them to offer banking services in India. Obviously, it's hard to know whether these banks would offer higher insurance levels if they could. If they did, they would automatically be a preferred choice, of course.

I haven't investigated this closely, and I'm not sure I'd understand what I read correctly if I did, but it seems like the branches of foreign banks in India behave like a distinct entity in some respects. I've seen the term "subsidiary" used. So, I am wondering if such a subsidiary bank ran into serious trouble, like a major fraud, and was unable to repay its depositors, what would happen. Is the parent bank legally liable, or could it wash its hands of the matter with impunity? And if so, would there be anything the depositors could do? There are certainly precedents of corporations withdrawing from India and leaving a mess behind when they ran into trouble. However, I know of no foreign bank failing in India and abandoning its depositors.

The bottom line is - are foreign banks in India best avoided if one is concerned with safety? It's hard to know how paranoid to be, but it's also clear that a bank system that does not have a safety net is not one where one can take safety for granted.

Even though each of the parent banks in my three examples are very large, in each case their presence in India, if considered as a separate bank, is quite small. I haven't run the numbers carefully, but for example Standard Chartered Bank India appears to be comparable in size to PMC in terms of assets. And SC may have a larger Indian presence than Citibank or HSBC. And it's clear in the absence of a safety net, that ones best defense lies in keeping ones money in as large a bank as possible.

I'm looking for information rather than speculations. Both the law in this case (if it exists), and precedents (if known), would be relevant and helpful. Even precedents in other countries; i.e. not India, might be useful. And precedents in related businesses, as well.

Answer 1

Two initial disclaimers:

1. When it comes to how bank failures are handled, as we have seen with even the most recent failures of major U.S. banks, these dynamics are inherently difficult to predict.
2. I am not an expert on many of the specifics of India's domestic bank regulation, so I'm not able to comment on the first three categories of financial institutions and corresponding risks that you outlined.

With respect to foreign banks, there are two flavors of legal-entity structure. The first is a subsidiary structure, which you alluded to in your initial post. The second is a branch structure. The difference between a branch and a subsidiary is somewhat similar to how you outlined it, but allow me to restate it in a different way.

A subsidiary is a distinct legal entity from its parent company (and in theory the limited liability inherent to corporations could isolate its parent from losses beyond the amount it initially invested); meanwhile, a branch is an integral part of the "parent" legal entity. From a capital management perspective, branches tend to be more efficient for banks; however since the 2009 financial crisis, many regulators around the world have sought to force bank to "subsidiarize" certain activities/operations of global banks, especially retail and consumer banking businesses. The idea here is to help the subsidiary benefit from more stable, locally "ring-fenced" capital in the event the parent is in distress.

Until March 2022 when it [announced that it was selling its retail and consumer banking business to Axis Bank], Citi operated using a branch structure in India (see Clause 3.8 on page 4 of the Citi India account terms). This means that Indian customers of Citi held accounts with the same legal entity as U.S. customers: Citibank, N.A. (Sidenote: the "N.A." in Citibank, N.A. stands for "National Association", which is effectively the same thing as saying "Inc." instead of "Incorporated"; I only mention it so that you can properly get the sense that I am talking about a specific legal entity not a brand name.) However, it is important to note that Indian regulators (e.g., the RBI) retain authority over whether to grant a local banking license/charter to a foreign bank wishing to do business in India, and therefore separate rules can and will apply for account holders of Indian branches of foreign banks.

With respect to deposit insurance limits, you could be right that the RBI may limit the applicability of foreign deposit insurance schemes in India for foreign-exchange or other similar reasons; however, in certain cases, it is also due to home country rules. For instance, even though the U.S. Federal Deposit Insurance Corporation ("FDIC") insures up to $250,000 per depositor held in accounts at Citibank, N.A. in the U.S., the same coverage did not apply to accounts held at the Indian branches of Citibank, N.A. This is due to a 2013 change in the FDIC's regulations. Again, as I noted above, the specifics of how a bank failure plays out are almost impossible to predict, but one can see from the recent failure of Silicon Valley Bank how this dynamic affected depositors at that bank's Cayman Islands branch here and here (tl;dr: they lost their money).

With respect to how other foreign banks operate their retail businesses in India, it looks like HSBC uses an Indian branch of a Hong Kong SAR-based legal entity based on their online account terms. It's not immediately clear how certain other banks operate (e.g. StanChart) based on the disclosures in their account terms, although this article suggests that DBS owns a local Indian subsidiary bank. Based on that article, it also sounds like RBI's preference going forward is for subsidiarization, which is in keeping with other regulators globally as mentioned earlier.

As for what you were suggesting with respect to size equaling stability, that's not always the case. For instance, Silicon Valley Bank was the 16th largest U.S. bank (out of 4500+ banks total) and had about $209 billion (that's $209,000,000,000) in assets at the end of 2022. Sometimes it's about bad management, not size.

Answer 2

India has dozens of commercial banks, public sector banks, private banks, and foreign banks. Foreign banks have been making a significant contribution to India’s economy. Around 46 foreign banks were operating in India as of September 30, 2019

All commercial banks including branches of foreign banks functioning in India, local area banks, and regional rural banks are insured by the DICGC.

Each depositor in a bank is insured up to a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of the bank's license or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

Risk is everywhere in life. However, keeping money with banks are comparatively safe. There are other alternatives also viz. Post office, LIC, Government bonds/ debenture, shares, mutual funds, gold, real estate, etc.

Shares and MF carry market risk. Real estates are not easy to liquidate in case of urgency. Gold is safe but it is a dead investment. Chances of theft are always there. One has to keep it idle in a locker.

Don’t panic. GOI and the regulators(RBI) are more concerned than individual depositors. They will not allow any bank to collapse. Merger/ amalgamation with other soundbank is always an alternative. The Regulator i.e.RBI will always think of it to protect the interests of the depositors.