What is it?
India plans to relax its rules on foreign banks’ branch operations and their ownership of private sector banks, but not until April 2009. There are some 30 foreign banks – including Citigroup, HSBC and Standard Chartered – and 30 private sector banks.
Meanwhile, the government has embarked on a programme to reform the country’s 27 state-run banks. It plans to merge them and increase their efficiency so they are better able to compete with their foreign and private sector counterparts.
But the government has received flak from both sides. Foreign banks are frustrated at having to wait several more years for a possible relaxation in the rules, which were actually tightened last year; and workers in state banks, worried about having to work harder and possibly lose their jobs, staged a one-day strike in October, paralysing the banking system.
Who dreamed it up?
The Ministry of Finance and the Reserve Bank of India (RBI), the country’s central bank.
What are the main provisions?
Foreign banks currently can operate only through one of two channels – a branch or a wholly owned subsidiary. Most, if not all, operate through branches, but the government restricts to 12 the total number of foreign bank branches that may be opened each year; that’s 12 across the entire foreign bank sector, not 12 per bank. In addition, a foreign bank is only allowed up to 5% direct investment in a private sector bank.
In 2009 these restrictions will be reviewed, possibly to allow foreign banks to open more branches and to take up to 74% direct investment in a private sector bank. (Note: different rules apply to foreign institutional, as opposed to direct, investment in private sector banks.)
As for state-owned banks, the government proposes to merge them, outsource back-office operations and cease recruiting in non-core banking operations. It also wants to reduce its minimum stake in them from 51% to 33%.
What’s in the small print?
The 5% limit on foreign bank direct investment in a private sector bank can be raised if the RBI categorises the Indian bank as “weak”; nor does the limit apply to non-bank financial institutions.
What does the industry say?
“Foreign banks would like to expand in India, but ownership remains restricted,” writes Janet Yellen, CEO of the Federal Reserve Board of San Francisco, on the organisation’s website. “The Reserve Bank of India understands the benefits that an increased foreign banking presence can bring to the financial sector, but it is committed to giving Indian banks a cushion of time to prepare for increased competition.”
C H Venkatachalam, general secretary of the All India Bank Employees’ Association, says there is no need for the country’s banking sector to be opened to global competition. He is planning further strike action.
How much will it cost?
The lost opportunity costs for foreign banks having to wait until 2009 are unquantifiable. But for many staff in state-run banks, consolidation and increased efficiency will cost them their jobs.
What do the regulators say?
“The presence of foreign banks in the country has been very useful in bringing greater competition in certain segments in the market,” says Rakesh Mohan, the RBI’s deputy governor. “The largest Indian banks have to be encouraged to expand fast, both through organic growth and through consolidation.”
The law of unintended consequences
Opening the country to global competition has created industrial unrest.
Could we live without it?
No. If Indian banks and other companies want to continue to expand abroad, the Indian authorities have to give reciprocal access to foreign organisations.
Rating: 5
Rating scale: 5 = Essential;4 = Useful; 3 = Neutral;2 = Unnecessary;1 = Waste of time
