Banks to get freedom to open branches soon: Raghuram Rajan

Banks will soon no longer need the RBI's permission to open branches, while foreign lenders will be encouraged to operate through wholly owned subsidiaries, Governor Raghuram Rajan said today as he unveiled his reform agenda for the banking sector.

"The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country," Rajan said at his maiden press briefing soon after taking charge. "No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch."

However, banks are required to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, he said. As per present regulations, domestic banks are required to compulsorily open 25 per cent of their branches in rural, unbanked areas.

"We will restrain improperly managed banks from expanding until they convince supervisors of their stability...But branching will be free for all scheduled domestic commercial banks, except the poorly managed," he said.

Talking about foreign-owned banks in the country, the 23rd Governor said the Reserve Bank of India (RBI) will encourage qualifying foreign banks to move to a wholly owned subsidiary structure, where they will enjoy near-national treatment on a reciprocal basis.

"We are in the process of sorting out a few remaining issues so this move can be made," he said.

Noting their contribution, Rajan said, "India has a number of foreign owned banks, many of whom have been with us a long time and helped fuel our growth."

They have been at the forefront of innovation, both in terms of improving productivity as well as in terms of creating new products, he said.

"We would like them to participate more in our growth, but in exchange we would like more regulatory and supervisory control over local operations so that we are not blindsided by international developments," he added.

The Indian public would benefit from more competition between banks and banks would benefit from more freedom in decision-making, he added.

Except for tier-I cities, the RBI has relaxed branch authorisation policy, allowing them to open administrative offices or service branches in cities with populations of over 50,000 but less than 1 lakh without its approval.

The decision was taken in 2011 after it was observed that branch expansion in tier-2 centres hadn't taken place at the desired pace. The relaxation is already available to banks wanting to expand in tier 3-6 cities.