Last month, RBI put its policy review on hold; given the current global financial situation, it has opted to wait till two issues are settled: one, there needs to be greater clarity about the stability and recovery of the financial sector abroad, and two, there must be a shared understanding of the international regulatory and supervisory architecture that is expected to evolve to deal with the crisis of solvency in foreign financial institutions. According to media reports, foreign banks understand and approve of the ‘pause’, but, at the same time, are hoping that more branch licences would be given as a sop in compensation for delay in liberalisation. The current issue therefore lies in RBI’s branch authorisation policy, which foreign banks have always been critical about.

Foreign bank presence has been increasing in India, but they still contribute a smaller share than new private sector banks. In January 2008, the British trade and investment minister had lashed out at what he called ‘protectionist’ RBI for not even acknowledging Stanchart’s request made 3 months earlier to set up 100 rural branches. Stanchart, which has 90 branches in India, the highest amongst foreign banks, has generally received 3-4 new branch licences every year from the RBI, but this year, hopes for more as it wants to set up as a pan-Indian bank. In the 2005 Road Map charted out, RBI policy for branch expansion was set out as follows: “For new and existing foreign banks, it is proposed to go beyond the existing WTO commitment of 12 branches in a year. The number of branches permitted each year has already been higher than the WTO commitments. A more liberal policy for under-banked areas will be followed.” Clearly this hasn’t quite been realised in practice. Though 23 new branches opened in 2004, on an average, around 13 branches have opened up in the country per year since 2005. Can we expect another burst of liberalisation from the RBI in branch authorisation now?

For an understanding of where Indian policy is headed, one can get cues from the recent Committee on Financial Sector Assessment, a joint commission of RBI and GoI. This report effectively refutes the argument that entry of foreign banks is necessary to improve the overall efficiency of the banking system; it argues that the new private sector banks match global standards and that there is vibrant competition in the banking system, even amongst public sector banks. According to the Report, RBI’s approach to foreign banks is already liberal, compared to global standards viz. a single class of banking licence, no restrictions in setting up non-banking financial subsidiaries in specified activities, uniform deposit insurance, uniform prudential norms and lower priority sector requirements. Further it states: ‘The CFSA, therefore, feels that the entry of foreign banks needs to be gradual and consistent with the overall financial policy strategy and the transition should happen smoothly without causing serious imbalances. A detailed cost-benefit analysis of the impact of the entry of foreign banks on the Indian financial sector would be useful as decisions are taken on the matter. Branch licensing policy could be broadly structured on the lines of that followed in new private sector banks, consistent with the country’s WTO commitments, but licensing of branches would continue to be based on reciprocity.” This points to cautious moves ahead, with not much change in broad policy.

So, is the branch authorisation policy really liberal or is RBI being a stick in the mud? The answer lies in the emphasis on ‘reciprocity’. According to the US 2009 National Trade Estimate Report of Foreign Trade Barriers, “Under India’s branch authorisation policy, foreign banks are required to submit their internal branch expansion plans on an annual basis, but their ability to expand is severely limited by nontransparent quotas on branch office expansion."

However, in a speech to the Bankers Conference in 2007, RBI deputy governor, V Leeladhar stated that between 2003 and 2007, 75 branch licences had been given to foreign banks, out of which 19 were for US-based banks. Yet, during the same period, the US had not authorised any expansion of Indian banks, despite requests for 3 branches, 2 subsidiaries and 9 representative offices, some of which were pending for more than 5 years.

This tu tu main main is a hallmark of reciprocal access negotiations, but just goes to show that there are ample grey areas, even in something that may seem so simple as branch authorisation.

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About the Author:
Payal Malik, is associate professor Delhi University, and advisor Indicus Analytics, An Economic Research Firm. Payal received her M.Phil. and MA in Economics from the Delhi School of Economics. She also has a Master of Business Administration from the University of Cincinnati, Ohio. She has made presentations and lectured the Indian Economic Service trainees at the Institute of Economic Growth

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