The government is considering far-reaching reforms in the banking sector, including giving banks the freedom to open branches in Tier-3 and Tier-4 cities, and granting 15 new licences to smaller banks for the first time in almost 11 years.

Prime Minister Manmohan Singh is learnt to have discussed several reform measures with Reserve Bank of India governor D Subbarao in the second week of October. They also discussed the idea of giving foreign banks full national treatment by suggesting they incorporate in India as wholly owned subsidiaries.

The reforms are part of a report submitted last month to the PM by his economic advisor, Raghuram Rajan, who chaired the committee on financial sector reforms.

Based on that report, the PMO has prepared a list of doable reforms. Rajan also attended Subbarao’s meeting with the PM.

The RBI governor is understood to have agreed to the idea of free branching in Tier-3 and Tier-4 cities, instead of similar permission in unbanked areas that the central bank has been contemplating. The government has termed it a “cautiously bold move”. “There is a possibility that RBI may permit free branching in semi-urban areas,” said Corporation Bank CMD JM Garg.

The PMO has suggested that RBI refrain from attaching any conditions such as asking banks to open branches in unbanked areas for every branch opened elsewhere.

Census 2001 defines a Class-3 city as one with a population of 20,000-50,000 and a Class-4 city as having 10,000-20,000. “Cities with less than 50,000 people account for about 7-8% of India's total urban population,” said Rajesh Shukla, chief statistician at National Council of Applied Economic Research.

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