Monday, June 15, 2009

Indian government is going to allow more foreign banks to operate in the country

Indian government, from now on, will gradually open up to foreign banks. The Committee on Financial Sector Assessment (CFSA), headed by Rakesh Mohan, Deputy Governor, Reserve Bank of India (RBI), published a report on March 30, 2009, which said that the country’s banking sector should open up for foreign banks as per the WTO requirements. The six volume report is available on the official website of The Reserve Bank of India, and came out just before meeting of the government in April, where officials will talk about allowing foreign banks to enter India and setting the terms of and conditions for their operations.

Here are some of the major points of the reports:

  • The entry of the foreign banks in India must be gradual.
  • If the government fails to meet the funding needs of the state-run banks then the government should go for a merger with a bank in which government has higher stakes.
  • Foreign banks can operate in India by opening up branches or through subsidiaries. However, the country where the bank is headquartered should also give Indian banks the same opportunity.
  • If a foreign bank operates in India through its subsidiary, then it would account for 74% stake in the Indian venture and the organization should be treated as a private organization by the Indian government. The subsidiary should also be listed on the local stock exchange.
  • The bank must give loans to small and medium farm enterprises.
  • Currently foreign banks are allowed to set up brands, subsidiaries. They are also allowed to convert their existing branches into wholly-owned Subsidiaries (WoS). If a foreign bank converts its branches into subsidiaries then it would be given permission to acquire stakes in Indian private banks that requires restructuring.

The Committee on Financial Sector Assessment (CFSA) was created in 2006. Currently, the Indian government is the largest player in the banking sector accounting for more than 70%. The State Bank of India is the biggest lender of the country with more than 10,000 branches. At present, twenty nine foreign banks are operating in India with more than 270 branches. India is bound by the World Trade Organisation agreements to allow foreign banks operate inside the country. It only allows twelve foreign banks per year. The report has been created to form a “well-considered approach” for foreign banks to fulfill WTO requirements.

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(This entry was originally published in March 2009 and it is based on the context of that time.)

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