Policy soon to facilitate entry of foreign banks: Rajan

The RBI is scheduled to present the quarterly review of the monetary policy on October 29

The Reserve Bank of India (RBI) would soon come out with major reforms in the banking sector that would allow foreign banks to enter India in a big way and even take over domestic lenders, Governor Raghuram Rajan said.

“That is going to be a big, big opening because one could even contemplate taking over Indian banks, small Indian banks and so on,” he told a Washington audience on Saturday. The policy framework for the entry of foreign banks in India, Rajan added, would be unveiled in the next few weeks.

The banking sector reforms, in particular to those facilitating entry of foreign banks in India in a “big way”, is part of the five pillars of reforms, including monetary policy framework, which RBI was to implement in the next few years, the RBI Governor said. “For foreign banks, if you adopt a wholly-owned subsidiaries structure and we are coming up with details on that in the next couple of weeks, we will allow you near-national treatment,” he said, quickly adding there would be two conditions. “One, reciprocity. Your country should allow the same to our own banks and, second, you come through one route. Either you have a branch or you have a subsidiary; don’t do both. That is primarily to simplify our regulatory function, but also to make it clean. But once you have a fully owned subsidiary, we would allow you a lot of freedom,” he said.

Acknowledging the price situation was an issue for the economy, Rajan said the ordinary monetary policy would be focused on containing inflation and not directed towards external sectors. RBI is scheduled to present the quarterly review of monetary policy on October 29.

Referring to the US shutdown, Rajan expressed full confidence in the American economy and ruled out selling of US treasury bills, which India holds to the tune of $59.1 billion.

“We (India) do not worry about that issue (US defaulting). We are not selling our US assets. We are holding on to them,” he said, adding, “I have to say, whatever default will be a technical default. “From my understanding because repayments can be prioritised, unless there is a sudden stop and markets stop taking new US debt meant to refinance the old debt, there is no chance that the US will default.”

Rajan said it would be good for the US to adopt fiscal policies consistent with its current needs and added, “the one and half per cent of US growth would be so tremendous and welcome to the world economy.” Elaborating on the banking sector reforms, Rajan said, they would be a part of his five pillars of reforms which would start with the monetary policy. “We got to get our monitory policy clear and understood to the broader public. Clearly, RBI has had a monetary policy framework. We need to make it much more explicit. And, also bring it up to modern standards of transparency and credibility.”  

Observing RBI had already announced free branching in India, Rajan said, “We announced that we will give new bank licences not just once but we would contemplate opening it on tap, people come in, submit their application, we consider them and give licences.”

Deepening of Indian markets is another area of policy reforms, he said, adding, “We want deeper Indian markets — the corporate markets, the government debt markets and the money markets.” Noting the level of technology in India is tremendous, Rajan said financial inclusion was another sector of his reform. “We can think about technology-based solutions to intrusions — spreading payments across the country. Across the board, we would use to spread financial inclusion technology,” he said.

“Whether it be corporate distress or financial institution distress, we need to improve our mechanism to make it simpler, cleaner and less value reducing,” he said.