RBI to review norms for entry of foreign banks

The Reserve Bank of India just six months before a review of norms for greater exposure to foreign banks has indicated that it will liberalize the guidelines only gradually.

In April 2009 RBI will be reviewing the norms, foreign banks have slowly started giving up hopes that the regulator will allow them to buy stakes in the healthier and bigger Indian banks.

RBI, in the latest Report on Currency & Finance, said that it might revise the entry norms of foreign banks from April 2009 in view of alleviating the risks of enhanced presence of these players in the country. It added that the emergence of large banks, involving foreign shareholding, can affect the business of smaller domestic banks and might result in a decline in lending to small enterprises, as in the case with several other economies.

It further added that an increase in presence of foreign banks will increase competition-may speed up the consolidation process of the Indian banking industry which might increase the risk of concentration if mergers or acquisitions involve large banks.

At the time of reviewing the norms for foreign banks in India, RBI main concern will be to reduce the impact of consolidation on existing domestic banks and the required supervisory and regulatory challenges considering the sophisticated operations of these foreign banking groups and their involvement in complex and sophisticated products.

RBI said that the liberalization of entry norms for foreign banks should not hinder the country’s ongoing emphasis on financial inclusion, credit to agriculture and SMEs, and public policy on credit delivery, cost and allocation.

However India will be allowing 12 branches of foreign banks in a year, it has been more liberal than the commitments. Previously between 2003 to October 2007, the central bank has given approval for 75 new foreign bank branches. But, during the second phase (April 2009 onwards), the challenges relating to co-ordination between home and host countries regulators will also be revisited.

On the other hand foreign banks have been complaining of RBI’s disinclination to open new branches. “If you ask for 40 branches, you get permission to open two,” said a senior executive at a foreign bank.

Moreover creating more rooms for foreign banks, implementation of Basel II norms will also cause further consolidation of the banking sector. RBI said then there can be changes in the ownership pattern of the public sector banks in the medium and long term.

In spite of number of bank mergers and acquisitions, the Indian banking system has become less powerful during the post-reform period. RBI added although some consolidation of the banking sector is necessary, the policies need to be formulated by the regulator to ensure that consolidation do not undermine competition in the future.