RBI to go slow on foreign banks

Subbarao says reforms road map in consultation with govt, other regulators.

Reserve Bank of India Governor D Subbarao on Tuesday indicated that the banking regulator will only review its policy on allowing greater play to foreign banks and not open the floodgates from April 2009. At the same time, he made clear his intent to move ahead with the financial sector reforms, for which he plans to prepare a road map in consultation with the government and other regulators.

“It is a very informed and educative summary of the current stance.... A review will be undertaken,” Subbarao, in his maiden address, reiterating the stance the apex bank took in the Report on Currency & Finance that was released last week, said.

 

The report had advocated a gradual approach to opening up the banking sector and pointed to the risk of concentration posed by the consolidation of banks, the global credit crunch and the impact on lending to segments like small and medium enterprises.

While the finance ministry was earlier keen on letting foreign banks acquire stake in healthy Indian banks, RBI has only allowed them to buy shares in the weak banks identified by it. As a result, foreign players have largely stayed away and only been strategic investors in a few Indian entities.

Pointing to a series of expert committee reports on the various aspects of financial sector reforms, Subbarao said, “What we need to do is to use the available analysis and advice to draw a roadmap that responds to our immediate and medium-term needs. Obviously, this is a shared responsibility of the government, the RBI and, indeed, all other regulators. Going ahead, consultations with all stakeholders will be an important process. We will engage in this task in earnestness.”

In recent years, government and market participants have blamed RBI for holding back crucial reforms and entry of new products, such as credit derivatives and interest rate futures, into the market.

The governor made it clear that fuller capital account convertibility remained a priority issue but indicated that the sequencing and the speed of the way forward will depend on how the global financial turmoil pans out.

Pointing to the recommendations of the second report of the Tarapore committee, Subbarao said, “We are ahead of the curve on some aspects, we are behind on some. There have been developments since the report was written. Capital account convertibility is a continuous process.”

Subbarao said that real sector reforms, which will improve physical and social infrastructure, will be the first priority of the government, followed by financial sector reforms.

Asked about the demand from oil marketing companies to reopen the special window for oil bonds that partly cover their under-recoveries, Subbarao said that the firms did not have bonds at present.

“The issue will come up when the Parliament approves the issue of the next tranche of such bonds.”