India to clarify norms for foreign banks soon: Raghuram Rajan2 min read . Updated: 13 Oct 2013, 10:43 PM IST
RBI governor says banks should enter as a branch or a subsidiary, not both; other nations should allow reciprocity
Washington: The Reserve Bank of India (RBI) will soon come out with major reforms in the banking sector that will allow foreign banks to enter India in a big way and even take over domestic lenders, governor Raghuram Rajan has said.
“That is going to be a big, big opening because one could even contemplate taking over Indian banks, small Indian banks and so on," he told a Washington audience on Saturday.
The policy framework for the entry of foreign banks in India, Rajan added, would be unveiled in the next few weeks. The move is part of the five pillars of reforms, including monetary policy framework, which RBI will implement in the next few years, the central bank governor said.
“For foreign banks, if you adopt a wholly owned subsidiaries structure, and we are coming up with details on that in the next couple of weeks, we will allow you near-national treatment," he said, quickly adding that there would be two conditions.
“One, reciprocity—your country should allow the same to our own banks—and second, you come through one route, either you have a branch or you have a subsidiary, don’t do both. That is primarily to simplify our regulatory function, but also to make it clean. But once you have a fully owned subsidiary, we would allow you a lot of freedom," he said.
Acknowledging that inflation was an issue for the Indian economy, Rajan said monetary policy would be focused on containing price rises and not directed towards external sectors. RBI is scheduled to present its next quarterly review of the monetary policy on 29 October.
India’s economic growth fell to a decade’s low of 5% in the last fiscal year while its current account deficit soared to an-all time high of 4.8% of gross domestic product (GDP) that year.
The Indian currency, which depreciated sharply after the US Federal Reserve (Fed) in May spoke of “tapering" its economic stimulus programme, has pushed up the cost of imports, mainly crude oil, and contributed to inflation.
During the debate, Rajan also warned that “easy money" created by the Fed’s stimulus policies is a large part of the problem.
“Easy money is part of our problem," he said.
Allaying fears of India not being able to meet its financial obligations, he said, “India’s external debt to GDP is 22%...and India has reserve of $280 billion, which is 15%. In other words, the country can pay three-fourth of its debt from its forex reserves."
“We bought over $60 billion of gold last year. $60 billion accounts for three-fourth of our current account deficit. If push comes to shove, we can pay the world in gold." Rajan added.
The RBI governor, who took charge in September, acknowledged that there was a bit of “euphoria" surrounding him.
“Expectations are high. Clearly I am not a superman. There is a little bit of euphoria in India," said Rajan, who is in Washington to attend International Monetary Fund-World Bank meetings. PTI