Foreign banks to get more leeway

The government seems to be in favour of expanding the share of foreign banks in the banking sector.

The ministry of finance and the Reserve Bank of India are considering a proposal to expand foreign banks' share to around 20 per cent from the present 15 per cent.

On the basis of funded assets only, foreign banks' market share is only about 7-8 per cent. If, however, one takes into consideration non[funded assets, such as derivatives and fee-based businesses as well, their share could be around 15 per cent.

Sources said the government is contemplating a change in the formula for calculating the total share of foreign banks in India.

The proposal has gained steam following the bilateral agreement signed with Singapore which signalled better treatment to their banks to operate in India vis-a-vis other foreign banks.

As per the agreement, three Singaporean banks will get to start with three branch banking licences each and will also be allowed to enter the insurance industry.

Normally, a foreign bank gets licence to set up a representative office and depending on its performance it converts the representative office into a branch.

If the government decides to raise foreign banks' share, it will lead to more relaxation in branch licensing policy for foreign banks in India.

Under the World Trade Organisation (WTO) treaty, India is committed to increase the number of foreign banking licences from 12 a year to 15-18.

The RBI is, however, in favour of inserting a clause of reciprocity with respective nations who get licences to operate banks in India.

This will pave the path for Indian banks setting shops overseas.

In its discussion with the government, the RBI is believed to have pointed out that foreign banks do not serve unbanked areas and normally focus on metros which are heavily banked. Therefore, new branching licences may have some riders on areas to serve or kind of services to focus on.

Once this is done, the formula for arriving at banks' share in the market is likely to change to take into account to include non-fund business which for foreign banks is too large. This will prop up foreign banks' share in the total banking pie substantially.

A slew of foreign banks from Japan, China and the Middle East have evinced interest in opening branches in India. Recently, Commonwealth Bank of Australia got the licence to set up a representative office.

Union Bank of Switzerland had applied for a bank licence but the application has hit the roadblock after Sebi found fault with UBS Securities of the group in its stock market activities. General Electric also wants to set up a bank in India through the acquisition route.

Opening a new account

Finance ministry and the RBI are considering a proposal to expand foreign banks' share to around 20% from the present 15%

On the basis of funded assets only, foreign banks' market share is about 7-8% now

If govt decides to raise foreign banks' share, it will lead to more relaxation in branch licensing policy.

Under the WTO treaty, India is committed to increase number of foreign banking licences from 12 a year to 15-18