| As someone who was fairly intimately involved with the third volume of the RBI's history, and in the preparatory work for the fourth, there are many things that I have learnt. One of them is that the RBI sins far less than it is sinned against, especially by finance ministers. Almost always, this is because of the inherent tension between fiscal policy and monetary policy. |
| Sometimes, however, another dimension gets added to this relationship: politics. For example, the RBI is asked to say no when the government, for whatever reason, feels unable to say it. The oldest example of this is market access for foreign banks. As the licensing authority, it falls to the RBI to stamp 'rejected' on their applications. Even if the government approves, in public it is obliged to say the opposite. |
| The foreign banks then start off a campaign. The burden of their song is that the RBI is the root cause of India's financial sector problems. They often use naïve or ill-informed economists for the purpose. The term 'reciprocity' is never mentioned by either side, even though it is all about reciprocity only. So, it helps to get the facts right. Two recent speeches by two deputy governors of the RBI help to do that. |
| In a recent speech* at Yale University, Rakesh Mohan gave out some numbers about the performance of private Indian banks. These show that while these banks have done very well since 1995, foreign banks have stagnated in terms of income, expenditure and total assets and their net profit has come down from almost 80 per cent in 1995 to just under 15 per cent. |
| "Shares of Indian private sector banks, especially new private sector banks...have increased considerably," says Mohan. "In terms of branch expansion, the compound growth rate of private sector banks over the period 2002-07 was almost three times that of all scheduled commercial banks and more than four times that of public sector banks...It is arguable whether there could have been much faster expansion without impairing their prudential quality and the integrity of their balance-sheets." |
| But what about foreign banks? In another speech**, another deputy governor, B Leeladhar, pointed out that "the foreign banks were far more dominant in the off-balance sheet business with a market share of as high as 72.66 per cent." However, he included ICICI and HDFC in his count, saying they are as good as foreign banks because "the non-resident ownership is very close to the 74 per cent permitted, which could, therefore, be considered as incorporated in India but predominantly foreign-owned banks." |
| This is a controversial statement. But I would read some 'reciprocity' angle into it, perhaps a cannon shot. Leeladhar further said, "The net profit per branch for foreign banks in India for the year 2005-06 was Rs 11.99 crore as against the corresponding figure of Rs 0.33 crore for public sector banks (PSBs). Further, for the year 2006-07, the Return on Assets (ROA) of the foreign banks was 1.65 per cent while the Return on Equity (ROE) was 14.02 per cent, as against the corresponding figures of 0.82 per cent and 13.62 per cent for the PSBs." |
| "These returns need to be viewed in the context of the international benchmarks for these parameters, which are generally considerably lower. Thus, the Indian operations of the foreign banks are very remunerative and the returns are notably higher than that of their domestic counterparts as also the customary international levels," he added. |
| Another thing that foreign banks complain about is the authorisation of branches by the RBI. On this, Leeladhar said, "As per India's existing WTO commitments, our obligation is to permit to foreign banks only 12 licences per year, including both the new entrants and the existing banks. This does not include ATMs...from 2003 to October 2007, the RBI authorised 75 branches of foreign banks in India, excluding ATMs." |
| He then touched on reciprocity. "...During the same period, the US did not authorise any office of the Indian banks in the US territory, vis-à-vis the requests from the Indian banks for setting up three branches, two subsidiaries and nine representative offices. Some of the requests have been pending with the US authorities for more than five years." |
| Now the UPA government won't, and can't, take on the US directly. So when the RBI does it, why do Indians complain? |
| * http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=371 ** http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=368 |
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