Red carpet welcome

RBI gives permission to foreign banks on a reciprocity basis, so that Indian banks are allowed to open branches abroad.

After the new RBI governor, Raghuram Rajan’s statement in Washington, that foreign banks would now get permission in a big way, a new debate has started in the country, especially in the light of shaky past of European and American banks. Questions are also being raised about why Rajan chose foreign soil to make this policy statement.

A sensation has been created by the governor that RBI is going to announce a monetary policy soon, as a part of five pillars of economic reforms, which would make foreign banks to enter India a big way, so that they would even be allowed to take over Indian banks.
It is notable that for the last few years, government of India has been contemplating permission to large business houses to open commercial banks. Before 1969, except State Bank of India and its associate banks, the entire banking sector was in private hands. Then the Indira Gandhi government nationalised 14 large banks. However foreign banks and those private banks, whose deposits were less than Rs 50 crore were not brought under the ambit of nationalisation. The thinking of the government was that nationalisation of banks would help the economy to reach a high rate of development by encouraging equity and priority sectors. In 1980, six more big private banks were nationalised. By 1980, banking sector was almost monopolised by the nationalised banks.

In the post 1990 economic reform era, many new private banks were started and others (including foreign banks) expanded their business. Whereas in 1990-91, hardly 14.6 per cent of total bank deposits belonged to private and foreign banks, by 2011-12 they increased to 29 per cent. ICICI, HDFC, Axis Bank etc. are now some big names in private sector banks. However, business and profits of public sector banks have also increased impressively. One of the major arguments behind the nationalisation of the banks was that most of the private banks belonged to the business houses, which used to play with the public money for the expansion of their business. Credit is extremely important for fulfilling the developmental needs of the country.

Union finance minister P Chidambaram has been making efforts for a long time to pave way for granting permission to business houses to open new banks. But the RBI was in no mood to oblige him. The RBI has been of the opinion that if business houses are given licenses to open banks, they would misuse people’s money to expand their business. In this scenario, people who deserve loans would be deprived of the same. Though the RBI did give limited permission for the opening of private banks in 1993, even at this time, big business houses were not given permission to open banks. But now, there is pressure on the Reserve Bank to allow business houses to open banks. For this, it has been given a rationale that industrial families have deep pockets, and thus, they would be able to invest more on technology and expansion of bank which would assist in the development of banking services in the country, especially in rural areas.

Serious objections

When Government of India was trying to rope in business houses into banking sector, apart from the RBI then under Subbarao, the International Monetary Fund (IMF) had also raised serious objections. In its recent report IMF has warned that allowing business houses in banking business may disturb the banking system in the country. IMF has also said that gains from such policy would be far fewer than the disadvantages arising out of the same.

At present though foreign banks are allowed to operate in India, in order to open a new branch, they have to take permission from RBI. RBI generally gives its permission on a reciprocity basis, so that Indian banks would also be allowed to open their branches abroad. At present 43 foreign banks are operating with 334 branches out of which Hong Kong’s HSBC, UK’s Standard Chartered Bank, USA’s Citi Bank, Netherland’s Royal Bank of Scotland are some major ones.

These banks have captured accounts of big businesses and rich people. Business, as well as profit of these banks has been rising consistently. Although foreign banks run their business in India, similar to that of Indian banks, due to their foreign origin, their transactions with their foreign entities are sometimes non transparent. According to a report, recently RBI has raised concerns about currency speculation, especially involving foreign banks and has shown its complete helplessness to control such speculative transactions, which take place outside the domestic territory, but having a bearing on banking transactions in India. RBI had very bluntly stated that it has virtually has no command to regulate such transactions.

But Raghuram Rajan’s statement that now foreign banks could take-over Indian banks, indicates looming dangers to the Indian banking system. It is an open secret that banks abroad, especially European and American banks are going bankrupt, losing confidence of the people. Our prime minister Manmohan Singh has also been saying very proudly that Indian banking systems is one of the safest banking systems and is insulated from the global financial upheavals. And now the present RBI governor’s endeavor to allow foreign banks to take over Indian banks, may create dangers to the existence of the ‘safe’ Indian banking system. The government and the RBI would be well advised to rethink the whole policy before venturing into unchartered territory which offers very little benefit for the Indian economy.