Raghuram Rajan, Reserve Bank of India (RBI) Governor, on Saturday said that the foreign banks will soon be allowed to operate more freely and will get opportunities by setting up wholly-owned subsidiaries in India. He also added that the rules for foreign banks’ entry into the domestic market will made clear soon by the RBI. Raghuram Rajan, dubbed recently by Indian as well as abroad media as the ‘rock star’ of Economics also said that he was not a ‘Superman’ and acknowledge the fact that there is some euphoria surrounding him. Rajan was speaking at a gathering organized by the Institute of International Finance (IIF) in Washington.
He added that if foreign banks adapted to wholly owned subsidiaries structure then RBI will soon announce the details regarding this issue. He also quickly added the two conditions: one-reciprocity, meaning the domestic banks from India must also be allowed to do business in respective foreign markets and second, banks must come through one route either have a branch or have a subsidiary; not both. Current rules specify that foreign banks can operate in India but under lot of scrutiny from the RBI, including the control over number of branches these banks can operate. These reforms are one of the five pillars that RBI plans to introduce in domestic banking sector over the period of time. Thus it will be a more open field for foreign banking players in India after the reforms are in place, albeit certain conditions, which seems to be fair.
The announcement also include that after some time of operating in India, these foreign players may also contemplate of overtaking small Indian banks. This announcement has come after few weeks in which RBI had asked for submission of applications for opening banks in India from Indian players in which it received many proposals, allegedly, some from big business conglomerates and marginal players as well.
Clearly, RBI means business and situation can be compared to FDI in retail sector. This announcement is an alarm bell for the Public Sector Banks (PSB), infamous for their ‘lazy banking’. RBI surely wants to heat up the competition and a mix bunch of foreign and Indian players are vying to tap the business. There is lot of potential in the Indian banking sector and its ever growing youth population can provide a great market for these aspirant newcomers. The old local PSB’s have a tough time ahead, as they have to either improve their financial and banking services or make way for the younger breed. As Darwin had said, “Survival of the fittest”, we may sure find out which are the fittest banks out there.