Keeping up from where he left in Washington DC earlier this month, RBI governor Raghuram Rajan on Tuesday announced plans for foreign banks operating in India to move on to become wholly owned subsidiaries in his second quarter monetary policy review.
The guidelines will come later but what Rajan laid out was an offer that if foreign banks follow this route instead of staying on as branches of overseas units, they stand to gain. They would get near-national treatment if they can produce a net worth of at least Rs 500 crore.
The move comes eight years after the RBI first released a road map for foreign banks. This is a strong vote of confidence in the Indian financial sector to take on foreign competition. Given that more than half the country’s population has no bank to go to, this could also present a huge business opportunity for foreign banks which would have more freedom in opening branches.
The presence of foreign banks is miniscule in the country. Forty three of them have just 333 branches across the country. Another 47 have only representative offices.
Not surprisingly then, foreign banks, many of which dominate money markets abroad, have had a very limited role in India. As of June 2013, RBI data shows that the share of foreign banks in aggregate deposits in the country is just 5.2 per cent compared with 52.3 per cent of nationalised banks and 22.3 per cent of the State Bank of India group.
But whether these incentives would be enough to offset other challenges faced by such banks operating in India is a bigger issue. Apart from concerns over stamp duty, the political reaction will also be keenly watched by experts and players. Remember, Rajan’s earlier announcement was met with sharp opposition from the Bharatiya Janata Party.
Ironically, then, the RBI’s big announcement came on the same day that India slipped to 134th rank on the Doing Business Report, 2014.
Surabhi is a special correspondent based in New Delhi.