India proposes to exceed its WTO commitment on allowing foreign banks to open branches in the country as part of efforts to reform the financial sector, deputy governor of RBI , V. Leeladhar has said.
“It is proposed to go beyond the existing WTO committment of 12 branches in a year,” he said at the Annual Washington Conference of the Institute of International Bankers recently. Leeladhar said that as per a two-phase roadmap released for foreign banks, RBI in the first phase between March 2005-09 had allowed them to operate through branches or set up 100% wholly-owned subsidiaries (WOS).
During this phase, permission for acquisition of shareholding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. Leeladhar said that in Phase II beginning April 2009, rules will be formulated, removing limitations on operations of WOS and they will be treated on par with domestic banks. They will also be allowed to list and dilute their stake after completion of a minimum prescribed period of operation. But at least 26% of the paid-up capital of the subsidiary of the foreign bank should be held by resident Indians at all times, he said.
Finally, foreign banks will be permitted to enter into M&As with any private sector bank, subject to the overall investment limit of 74%. On future challenges facing Indian banks, Leeladhar said globalisation posed both a challenge and opportunity for Indian banks.
He said the S S Tarapore Committee had observed that under a full capital account convertibility regime, the banking system will be exposed to greater market volatility.
“This necessitated enhancing risk management capabilities in the banking system in view of liquidity risk, interest rate risk, currency risk, counter-party risk and country risk that arise from international capital flows,” Leeladhar said.
He said potential dangers associated with proliferation of derivative instruments also needed to be recognised in the regulatory and supervisory system.Besides, issues relating to cross-border supervision of financial intermediaries in the context of greater capital flows also need to be addressed, he said.
With respect to Basel II implementation, he said it had been decided that foreign banks operating in India and Indian banks with presence abroad will migrate to the standardised approach for credit risk and basic indicator approach for operational risk under Basel II from March 31, 2008.Other scheduled commercial banks are required to migrate to Basel II by March 31, 2009, he said.
Basel II offers banks the opportunities of refinement of risk management systems and improvement in capital efficiency, he said, adding that the “transition from Basel I to II essentially involves a move from capital adequacy to capital efficiency.”
According to him, Basel II has also brought into focus the need for a more comprehensive risk management framework, to deal with risks, including credit and market risk and their inter-linkages.
These are oversight by the board of directors or supervisory board, oversight by individuals not involved in the day-to-day running of various business areas, direct line supervision of different business areas and independent risk management, compliance and audit functions.
Derivative activity was increasing at a brisk pace in India and a risk management framework for derivative trading was an essential pre-requisite, he said.
However, absence of clear accounting guidelines in this area was a matter of significant concern, he added.The Institute of Chartered Accountants of India (ICAI) was considering the issue of accounting standards in respect of financial instruments, he said.