DBS India CEO Sanjiv Bhasin said the bank was evaluating the RBI guidelines. "If you read it, it looks intimidating, but the fact is you have been given five years," Bhasin said, referring to the priority sector lending target. "It's difficult but it's certainly achievable".
Citigroup and HSBC declined comment. StanChart welcomed the guidelines but said it was too early to comment in detail.
In recent years, Barclays has exited retail banking in India and Royal Bank of Scotland has sold its Indian credit cards, mortgage and commercial banking portfolios, part of a broader trend by global banks looking to shore up their capital base to meet regulatory requirements.
(Read more: Is India's economy finally getting its groove back?)
"Most of the foreign banks in India have moved away from retail banking and are now focusing on corporate banking," said the India operations head of a European bank who declined to be named.
Under the new rules for wholly-owned subsidiaries, foreign banks can buy a local private-sector lender after a central bank review of overall foreign bank penetration.
To prevent foreign domination of the banking sector, the central bank will restrict further entry of new wholly owned subsidiaries of foreign banks if the assets of institutions owned abroad exceed 20 percent of the country's total.
Currently, foreign banks' capital, reserves and surplus account for 15 percent of the overall banking sector, even though foreign banks have less than 5 percent of industry deposits, leaving little room for big acquisitions.
(Read more: Soaring India stocks have strategists on edge)
India's banking system is dominated by state banks, which accounted for more than two-thirds of industry assets at the end of March 2012, the latest RBI data showed.
Foreign banks operating in India before August 2010 have the option of continuing as branches. "However, they will be incentivized to convert into WOS (wholly owned subsidiaries) because of the attractiveness of the near-national treatment afforded to WOS," the central bank said.