Reserve Bank report sees many hurdles to opening up of sector

“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.

However, it admitted that the entry of foreign banks would increase efficiency and infuse technology, skill management and superior risk management practices.

The report also pointed out that the majority ownership in public sector banks was a hurdle that needed a solution. The present floor of 51 per cent Government holding in state-owned banks was an issue that merited consideration in view of the need of these banks to raise capital and the changing environment.

In terms of the present provisions of the law, government equity in public sector banks cannot be less than 51 per cent. This can become an issue hampering the growth of public sector banks if the government is not able to provide adequate capital for expansion of public sector banks. Thus, there would be need to find a durable solution to the problem, whereby either the government contributes to the capital of banks or allows banks to raise capital from the market, the RBI report said.

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