The world’s largest bank, Hongkong and Shanghai Banking Corporation (HSBC) (NYSE: HBC) has decided to scrap its plan to buy the retail and commercial banking businesses of Royal Bank of Scotland in India, after negotiating for almost two-and-a-half years. The firms set a long stop date of November 30 2012 to reach an agreement on all elements of the deal – since that date has arrived without all issues being agreed to, the deal has fallen through.

Royal Bank of Scotland Group PLC said Friday it would no longer sell its Indian retail and commercial business to HSBC Holdings PLC and would instead wind the business down. The deal, which was first announced in 2010, fell through because all the commercial terms of the deal couldn’t be satisfied, HSBC said in a statement.

In a statement RBS said its business in India is profitable and comprised total assets of GBP190 million as at Sept. 30. The business’ 31 branches generated revenue of GBP42 million in the first nine months of the year. The business serves 400,000 customers. When the talks were first announced RBS said it expected to attract a premium of GBP59 million on the unit’s book value.

RBS has already been shrinking its Indian operation over the last few years to prepare it for a sale. The disposal was part of RBS’s strategy of shedding non-core assets to shrink its global balance sheet. The Indian business accounts for around 0.5% of RBS Group’s remaining GBP65 billion of non-core assets.

This is the second time RBS has failed to close a deal involving sale of its India assets. Earlier this year, the foreign lender announced plans to sell cash equities, mergers and acquisitions, and equity capital market businesses to Malaysian bank CIMB. CIMB later withdrew from the deal because of an “unexpected legal issue”.

The Asia market has quickly become less attractive for the financial services sector, as thin margins and a changing regulatory environment have dissipated many of the benefits of the burgeoning region.  RBS’s Indian unit has about 190 million pounds of assets, 31 branches and serves 400,000 customers, the bank said. It generated revenue of 42 million pounds in the nine months to the end of November.

Shares in RBS fell 1.3 percent to 295.2 pence on the London Exchange, little more than half the average price the government paid when it provided the bank with a 45.5 billion-pound rescue during the financial crisis. The stock has climbed 46 percent this year. HSBC’s shares rose 1 percent to 637.7 pence.