Mumbai: Foreign banks planning to enter India may have to wait long if the report of the Committee on Financial Sector Assessment (CFSA) is taken seriously by the government and the Indian central bank. Chaired by Reserve Bank of India (RBI) deputy governor Rakesh Mohan, the committee has made it clear that the opening of the banking space to foreign players should be based on “reciprocity”.
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In other words, India should continue to keep the doors shut for banks of those countries that do not open the doors for Indian banks. The US is one such country.
Foreign banks could operate in India either through branches or the subsidiary route subject to reciprocity, says one of the critical recommendations. The six-volume report, submitted to stand-in finance minister Pranab Mukherjee last week, was formally released on Monday.
The branch licensing policy, according to the report, could be broadly structured on the lines of new private sector banks and in accordance with India’s commitment to the World Trade Organization (WTO), but “licensing of branches would continue to be based on reciprocity”.
Two-way street: Reserve Bank deputy governor Rakesh Mohan. Abhijit Bhatlekar / Mint
Going by WTO norms, RBI needs to issue 12 branch licences to foreign banks every year, but it has actually been issuing more.
The Mohan panel report is also comfortable with RBI’s existing norms for foreign banks’ operations in the country, which stipulate that if a foreign bank wants to float subsidiaries, its shareholdings should not exceed 74% and the subsidiary should be listed on Indian stock exchanges.
These norms were made public in March 2005 when RBI unveiled its road map for foreign banks and a review of these norms are due in April. However, it seems fairly certain now that the banking regulator will not liberalize its policy for foreign banks even if it formally undertakes the review.
Last year, an RBI report on the emerging issues and challenges for the Indian banking sector, edited by Mohan, also argued against the opening up of the sector. It did not dwell on the issue of reciprocity, but said the “general perception that the foreign banks bring many benefits to the host countries in the emerging markets” should be critically reviewed. It also harped on the policy concern that the foreign banks enter a country, but do not deliver the benefits to the wider community on account of their largely urban-centric presence.