If you’re a salaried professional and you operate your bank account without even having to visit a branch, you have a foreign bank to thank for this innovation. Just as Citibank introduced the Suvidha account in 1998 to middle-class India, revolutionizing branchless banking, can we expect more innovations from foreign banks as they’re slowly allowed into India?
With Credit Suisse getting an in-principle approval from India’s banking regulator, the Reserve Bank of India (RBI), this week, following a nod to ANZ last week, India will soon start anticipating the rewards that come with globalizing its banking sector. These include competition, not to mention better practices—more efficiency— both of which should drive down costs for consumers.
Illustration: Jayachandran / Mint
These practices also seem to have made foreign banks more profitable than their Indian counterparts in the last decade—despite the fact that they have fewer branches and own a measly proportion of assets of the Indian banking system, roughly around 8%. Some of this profitability, the Raghuram Rajan committee in 2008 noted, is because they can attract low interest-yielding corporate accounts—such as Citibank’s Suvidha—that reduce cost of capital, but still offer the customer solid services. Indian banks could learn a thing or two.
Another potential benefit is financial inclusion, the hope that foreign banks will help expand the banking market. This will probably work both through regulation—RBI giving more branch licences for unbanked regions— as well as through market forces. As cities get saturated, banks have every incentive to push towards towns and villages.
Still, this has always been the prime concern, that foreign banks cream the top and forget the bottom. They themselves will have to change this perception. Yes, RBI has been less liberal in granting licences to them in the past but, if anything, this should be forcing them to innovate more. It will now be interesting to see what business models the likes of Credit Suisse develop, as RBI, in the process of levelling the field, gets India back on track to banking globalization.
Yet, there are questions from what forced India to change track in the first place: It’s the financial crisis that derailed RBI’s 2005 road map for foreign banks. Will India somehow import maladies from Western financial systems? Last week’s RBI financial stability report prompts worry that, despite their 8% assets, foreign banks comprise three-fourths of the banking system’s off-balance sheet exposure (mostly to complex derivatives).
But, at most, these are questions that call for sound regulation. They shouldn’t become an excuse for protectionism.
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