A step closer to global banking?

Tue, 17 Dec Pre-Open

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For a while now it is believed that foreign banks were trying to enter India and have been seeking the government's go ahead to acquire Indian banks. RBI governor Raghuram Rajan is believed to have now allowed foreign banks to acquire Indian assets. However, despite allowing foreign banks to get what they want, it seems though there may not be a big queue lining up for the same. This is due to the current policy environment and the seemingly challenging banking rules.

Earlier this year, three major foreign bank - Goldman Sachs, Morgan Stanley and UBS surrendered their banking licenses. They may have done so for various reasons including the commercial banking business model in India and the strict guidelines of the RBI which include features such as statutory liquidity ratio (SLR), CRR (Cash reserve ratio) and priority sector lending, amongst others. Not to mention the vast investments that would be required to build and expand commercial retail operations. To add to that, with large Indian industrial houses such as the Tatas and Mahindras withdrawing their bids for acquiring banking licenses, it added to the point of whether the current banking model is an onerous one.

The Hindu Business Line points out that another key reason for the foreign banks losing interest could be the change in status of such banks in India during the post 2008 crisis. Earlier, foreign banks were allowed to operate as branches. This was done so that their parent companies could make good any losses on account of this branch status. However, post the crisis, the RBI asked foreign banks to convert these branches into wholly owned subsidiaries given that the parent companies themselves were going through difficult times. This move was aimed to essentially safeguard the local bank's capital. But it would also require higher capital commitments from the foreign banks, more funds directed towards lending, opening of new branches in rural parts of the country, amongst other things. In return, as the business daily puts it, this change in status would allow them near-equal treatment as Indian banks.

Another key deterrent seems to be the point of reciprocity, wherein foreign banks would be welcome only if Indian banks were allowed to operate commercially in their countries.

But the scenario may just change...

Top officials from the current government including the PM, FM and RBI Governor had visited the US a few months ago for various discussions and meets. The key conclusions were towards improving relations between the two nations which seems to have reaffirmed the commitments for a high standard Bilateral Investment Treaty. This would be aimed at economic growth and job creating in both countries. Would this eventually lead to more interest from some of the world's largest banks from the US? Well, only time will tell.... But given the changing banking sector landscape in India and the need to mobilise investments that would beef up economic growth, opening gates for foreign players will do only good to the financial system. And perhaps the Governor acknowledges these facts today.