Rajan under BJP fire over foreign bank entry remark

RBI governor Raghuram Rajan in Washington said that foreign banks would be allowed to set up shop in India

Reacting sharply to Reserve Bank Governor Raghuram Rajan’s announcement in Washington that foreign banks would be allowed to set up shop in India, the Bharatiya Janata Party (BJP) said on Monday that such a major policy change should have been first discussed in the country.

Slamming the United Progressive Alliance (UPA) government, BJP spokesperson Prakash Javadekar said: “Not only are the government and RBI going to open the Indian market for foreign banks, they are considering allowing foreign banks to take over small Indian banks. Such a major announcement should have been first debated here taking into account the global experience.”

BJP’s objections to liberalisation of the banking sector is one among the several economic initiatives taken by the UPA government including 100 per cent foreign direct investment (FDI) in multi-brand retail and further opening up of the insurance sector.

The main Opposition party warned that banks in the US and Europe have faced financial difficulties and closure and inviting them here may lead to similar repercussions.

“Are we importing the financial crisis now? The 2008 global financial crisis has raised a question mark about the viability as well as the methodology adopted by foreign banks. Governments all over the world had to provide large bailout packages to these banks,” pointed out Javadekar, who had worked for a PSU bank before joining politics.

According to the BJP, the contribution of foreign banks to “financial inclusion” is minimal and below expectation. Moreover, they only compete with Indian banks in the creamy business segment.

Javadekar said that in 2002 when BJP-led National Democratic Alliance was in power at the Centre, there was a proposal that private sector companies be allowed to open banks. The proposal was shot down as there were “moral hazards” and firewalls would not be effective.

"If the company goes down then its bank would collapse," he said. The party felt this announcement by the government of allowing foreign banks is also contrary to its stated position on the issue.

"All the while, the UPA government was stating that Indian financial and banking sectors withstood the global financial crisis because major Indian banks are of public sector. Now it wants to suddenly change the course of this sector," Javadekar said.

BJP asked the government to explain the details of such a policy in the national interest. It felt that such an important announcement should not have been made unilaterally.