To give the domestic banking sector some breathing time to consolidate and conform to a stricter regulatory regime, foreign banks will be allowed only a gradual entry. The plan is being given final shape now after Prime Minister Manmohan Singh indicated Indias willingness to open up the largely state-owned banking sector to foreign direct investment (FDI).
Finance minister P Chidambaram told FE that the Prime Minister has cleared a twin-track approach for opening up the private banking sector to FDI. In Track 1, foreign banks may acquire 10% stake a year till their holding crosses a threshold level when the investee bank becomes a subsidiary of the foreign investor.
In Track 2, the Indian banks will be encouraged to consolidate. Simultaneously, a stronger regulatory and prudential regime will be put in place. The government hopes to sequence the event such that the domestic banks are fully geared to take on foreign competition over the next 3-4 years.
Mr Chidambaram said, After the discussion paper floated by the Reserve Bank of India, this is the route we wish to take to open up the private banking sector to foreign investment. I think there is convergence between RBI and the government that we will pursue a gradual investor-friendly approach and at the same time vigorously pursue consolidation.
As far as linking voting rights to economic ownership is concerned, the finance ministry has already introduced the Bill to amend the Banking Regulations Act. It also has received the recommendations of the standing committee on finance which agreed to the governments move to lift the 10% voting rights cap. The committee, however, asked RBI to put in place a fool-proof mechanism to check misuse of the provisions by unscrupulous Indian and foreign investors.
Mr Chidambaram said that the Bill is likely to be re-introduced in Parliament in the winter session. The Bill will not only allow foreign banks to have subsidiaries in India over a period of time, but will also prod Indian banks to consolidate.