Discussion paper on foreign banks

The discussion paper on foreign banks should have been issued two years ago, but then the global financial crisis made foreign banks look more dangerous and less worth letting in. However, its significance becomes clearer if it is read together with another paper the RBI issued last August on entry of new private banks. It is seriously thinking of giving new licences.  It has done so only rarely; it licensed 10 banks after the 1991 reforms, and another two a decade later. After that it has been resolutely inactive for a decade. Why the sudden end of somnolence? It points to the poor outreach of banking in India; despite the fact that the RBI forced banks to work for the common man at least since the bank nationalization of 1969, a large proportion of the population has no access to banks. This has led a series of official committees, notably the Percy Mistry Committee and the Raghuram Rajan Committee, to admonish the RBI to allow more competition. It was pretty cold to the committees while they sat; even now it cannot bring itself to mention Percy Mistry. But the finance minister himself promised more competition in banking in his last budget speech. In case the RBI still continued to resist, he created the Financial Stability and Development Council, an overlord which would override even the RBI. Overcoming all obstacles, he actually created the council last month; its membership left no doubt that the finance ministry was going to be in charge. So the RBI could no longer put off acting on new bank licences; and if it allowed new banks, it could hardly ignore foreign banks queueing to set up business in India. Opening up of the financial sector is the one demand India has consistently faced in its international negotiations going back to the Uruguay round of two decades ago; every time it persistently stonewalled. All that it conceded in the Uruguay round was that it would allow a dozen new branches of foreign banks to be opened every year, in a country with close to 80,000 branches. But times have changed. India has become a superpower, albeit a junior one. The prime minister sups with the mightiest leaders of the world, and as leader of the country immune to a meltdown, advises them on how to run their countries. If they ask him to let their banks come to India and learn lessons from a stern schoolmaster called the RBI, he can hardly refuse. But the RBI has put its foot down: foreign banks must bring equity, set up subsidiaries, and not expect to raise capital in India. This may be a rearguard fighting a losing battle, but it will take as long as it can to lose.