Finally, the RBI has broken its silence on two keenly awaited issues ? expansion plans of foreign banks and introduction of Bank Holding Company (BHC)/Financial Holding Company (FHC) in India while announcing its annual credit and monetary policy unveiled on Tuesday.
RBI said it would prepare a discussion paper on the mode of presence of foreign banks through branch or WOS by September 2010.
On BHC/FHC model, RBI has said that considering the complexity of the issues involved and implications for the financial system in general and banking system in particular, it is proposed to constitute a working group with the representatives from the government, the Reserve Bank, Sebi, Irda and IBA to recommend a road map for the introduction of a holding company structure together with the required legislative amendment/framework.
The RBI had placed a discussion paper on holding companies in banking groups on its website in August 2007 for public comments. The feedback received on the discussion paper underscored the need for introduction of bank holding companies in India to ensure an orderly growth of financial conglomerates and better insulation of a bank from the reputational and other risks of the subsidiaries/affiliates within the group.
The committee on Financial Sector Assessment (CFSA), in its report issued in March 2009, observed that given the lack of clarity in the existing statutes relating to the regulation and supervision of financial holding companies, the holding company structure as prevalent in the US for financial conglomerates is not currently in use in India. The committee noted that the absence of the holding company structure in financial conglomerates exposes investors, depositors and the parent company to risks, strains the parent company?s ability to fund its own core business and could restrict the growth of the subsidiary business.
Also in February 2005, the RBI had released the ?road map for presence of foreign banks in India? laying out a two-track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India.
The first track was the consolidation of the domestic banking system, both in the private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronised manner.
When the revision of presence of foreign banks in India was due in April 2009, the global financial markets were in turmoil and there were uncertainties surrounding the financial strength of banks around the world. Accordingly, the Annual Policy Statement of April 2009 indicated the intent to continue with the current policy and procedures governing the presence of foreign banks in India and to review its road map after due consultation with the stakeholders once there was greater clarity regarding stability and recovery of the global financial system.
