Even as the issue of increased presence of foreign banks is due for review in the second phase in April 2009, a Reserve Bank of India (RBI) report on Thursday said that regulatory hurdles and the impact on local banks would need to be weighed before opening up the banking sector further.

“Various issues associated with the increased presence of foreign banks such as impact on the domestic banks, supervisory and regulatory challenges in view of their sophisticated operations and their involvement in complex and sophisticated products, financial inclusion, credit to agriculture and SMEs, and public policy on credit delivery, cost and allocation would need to be weighed,” the RBI said in its ‘Report on Currency and Finance 2006-08’.

The issues relating to co-ordination between home and host countries’ regulators would also pose a challenge, it said. In the roadmap by the RBI released in February 2005, the opening up of the domestic banking sector to foreign banks was envisioned in two phases. The first phase envisaged that foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100 per cent wholly owned subsidiary following the one-mode presence criterion.

Saying that liberalisation of financial services industry raised concerns, the report said the potential of increased foreign bank presence could expose a country to external shocks. “Opening the domestic financial system to foreign financial services providers without any restrictions also raises the possibility of domestic financial institutions being taken over by foreign banks,” the report said.

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