Gradual opening up of sector to foreign banks

The committee on financial sector assessment (CFSA), headed by Reserve Bank of India (RBI) Deputy Governor Rakesh Mohan, has favoured a process of gradual opening up of the sector to for foreign banks.

The report, which was released today, said that such a process should be consistent with the overall financial policy and the transition should be smooth without causing serious imbalances.

The report is broadly in line with the stand taken by RBI and comes just ahead of a review of the norms relating to the entry of foreign banks in India initiated by the regulator. On its part, the committee has said foreign players should be given the option to enter India either by setting up branches or through subsidiaries.

At the same time, it said that reciprocity from the country where the foreign bank was headquartered should be a key element, though India was committed to meeting its obligations under the World Trade Organisation agreements. India has only committed to allowing 12 foreign bank branches a year.

Besides, the panel said that foreign banks which set up subsidiaries should be allowed to hold up to 74 per cent stake in the Indian venture and should be subjected to all the rules that are applicable to private sector players.

In addition, the Indian arms of the foreign banks would have to be listed and expansion of operations of global players should not result in the farm sector of small and medium enterprises being denied credit.

At present, foreign banks are permitted to set up branches, wholly-owned subsidiaries (WoS) or convert existing branches into WoS.

Foreign banks that convert branches into subsidiaries are permitted to acquire a stake in Indian private sector banks that need restructuring. The report said that – though there is a widely-held perception that the entry of foreign banks would enhance the overall efficiency of the sector through adoption of new technologies, products and management techniques – new private sector banks compare quite favourably against foreign banks on all these parameters.

It also said that RBI’s regulatory approach towards foreign banks has been quite liberal compared with established global standards and is characterised by a single class of banking license, no restrictions on setting up non-banking financial subsidiaries in specified activities, uniform deposit insurance, uniform prudential norms and lower priority sector requirements.