Discussion Paper : Presence of Foreign Banks in India

At a time when banks around the world are coping with a wide spectrum of effects of the financial meltdown, from slack economic activity to fresh debt crises, India presents a refreshing contrast, pushing ahead with the expansion of its own financial system. The Reserve Bank of India has released a discussion paper on the enhancement of foreign banks in the country.

In 2005, the Reserve Bank released the “Road map for presence of foreign banks in India” laying out a two track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India. One track was the consolidation of the domestic banking system, both in private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronised manner. The Road map was divided into two phases, the first phase spanning the period March 2005 – March 2009, and the second phase beginning after a review of the experience gained in the first phase. However, when the time came to review the experience gained in the first phase, global financial markets were in turmoil and there were uncertainties surrounding the financial strength of banks around the world. At that time it was considered advisable to continue with the current policy and procedures governing the presence of foreign banks in India.
Governor on April 20, 2010, in his Annual Policy Statement for 2010-2011 indicated that while global financial markets have been improving, various international fora have been engaged in setting out policy frameworks incorporating the lessons learnt from the crisis. Furthermore, there was a realisation that as international agreement on cross-border resolution mechanism for internationally active banks was not likely to be reached in the near future; there was considerable merit in subsidiarisation of significant cross-border presence. Apart from easing the resolution process, this would also provide greater regulatory control and comfort to the host jurisdictions.

Accordingly, this discussion paper on the form of presence of foreign banks in India has been prepared taking into account, inter-alia, the lessons learnt from the recent global financial crisis and the practices followed in other countries. Based on the feedback received on the approach outlined in the discussion paper, the Reserve Bank will frame detailed guidelines on the presence of foreign banks in India.

Detailed  Discussion Paper.