Foreign control over Indian banks should be reviewed, says Y V Reddy

Former Reserve Bank of India (RBI) governor Y V Reddy made a strong pitch for curbing foreign presence in the Indian banking space, arguing that most of the shareholdings of India’s private sector banks are with foreigners, even as they are known as Indian banks. 

“The current policy of ownership and governance in banking needs to be reviewed urgently to correct the outdated and distorted policies. This should be done before our banking system passes on to foreign owners, irrevocably,” Reddy said at the K L N Prasad memorial lecture in Hyderabad. 

Foreign shareholding in the largest private sector banks is well over 70 per cent. In public sector banks, the government and large domestic institutions own most of the shares, while a significant portion of the balance shares is held by foreigners. 

“Our banking system is predominantly owned by the government, followed by foreigners and least by Indians. I repeat, least by Indians,” Reddy said in his speech, adding, while the share of public sector banking would come down, under current policy, “that space will be occupied irrevocably by foreigner-owned banks unless there is a change in policy”. 

“Indian incorporated but foreigner-owned banks are no substitute for Indian-owned banks… the diversified ownership as a buffer is a myth.  The fit and proper ownership, and not the extent of ownership, should be the criterion and it is time we have that in banking in India,” Reddy argued. “Banking is too important to allow foreign presence freely and WTO commitments of all countries are a testimony to this,” the former RBI governor said. 

“Indians’ profile has the best brains, and best technology for global banks; and it will be a tragedy if Indians cannot own and run our own banking system,” Reddy said.

According to Reddy, there is no crisis in the Indian banking system, but the system is overburdened with policy.

“The first step for improving our banking system is a commitment to reduce SLR (statutory liquidity ratio) and CRR (cash reserve ratio) to global levels as soon as possible.  We cannot have a globally competitive economy with an over-burdened banking system,” he said in his speech.