Central bank puts off policy on foreign banks' presence

Citing the current global financial turmoil and concerns regarding the financial strength of banks around the world, the Reserve Bank of India (RBI) has decided to leave unchanged its policy on presence of foreign banks in the country.

The second phase of the ‘Roadmap for Presence of Foreign Banks in India’ has thus been put on hold. The second phase was related to the extension of national treatment to wholly-owned subsidiaries, dilution of stake and permitting mergers and acquisitions of any private sector bank in India with foreign banks.

In view of the current global financial market turmoil, there are uncertainties surrounding the financial strength of banks around the world. Further, the regulatory and supervisory policies at national and international levels are under review, RBI said in its annual policy for 2009-10.

RBI would continue with the current policy and procedures governing the presence of foreign banks in India. A review will happen once there is greater clarity regarding stability, recovery of the global financial system, and a shared understanding on the regulatory and supervisory architecture around the world.

“I am not deeply concerned by RBI’s decision on putting the roadmap for foreign banks to further debate and discussion. It would be naive to expect anything else, given the changed global environment,” said Gunit Chadha, managing director and chief executive officer of Deutsche Bank India.

“RBI has always been in favour of an increasingly level-playing field for foreign, private and public sector banks and I hope, with the roadmap being pushed out, it adopts a more liberal approach towards licensing of bank branches as a pallative,” he added. The first phase of the roadmap, released by the central bank in February 2005, was due for review this month and RBI had said it would take a call on whether to go ahead with the second phase based on the experiences of the first.

As part of the first phase, foreign banks, previously restricted to branch operations, were authorised to set up wholly-owned subsidiaries and acquire shareholdings in those Indian private sector banks identified as in need of restructuring.

Foreign banks, on their part, haven’t shown much interest in the wholly-owned subsidiary model of operation. The head of a foreign bank said it is still unclear whether a wholly-owned subsidiary gets the same treatment as a private bank. “There are also significant costs around stamp duties, there are some norms around local listing, which could be a point of consideration for foreign banks,” he added.

Instead, foreign banks opted to grow their balance sheets by setting up non-banking finance companies (NBFCs). However, the recent deterioration in asset quality of loans, especially in the retail portfolio, has prompted many foreign banks to slow their NBFC operations. Some hints to RBI’s present decision could have been gleaned from the recent CFSA report.

The report, presented on March 30, advised that the opening of the banking space to foreign banks be gradual. It stressed that licensing of branches to foreign banks be based on the principle of reciprocity.