Indian, Pak banks to set up shop across borders

Banking relationship to be re-instated after 1965.

After a gap of four decades, India and Pakistan are ready to re-establish banking ties. The central banks of the two countries have signed an understanding to this effect.

The understanding will allow Indian banks to open two branches in Pakistan and vice versa. The two south Asian neighbours had snapped banking ties after the 1965 war.

The Reserve Bank of India and the State Bank of Pakistan will mutually decide the banks that are to be allowed to open branches, keeping in view their respective regulatory policies and procedures, according to an RBI release.

A decision on opening additional branches of these banks will be taken by the RBI and the SBP in adherence to their respective policies and licensing norms applicable to foreign banks.

State Bank of India and Punjab National Bank (PNB), which had branches in Pakistan, are likely to get the regulatory nod to set up shop in Pakistan in the first round. Their branches had been seized by Pakistan's custodian of enemy property during the 1965 war. "We do not rule out the revival of some of the old branches," said a banking source.

SBP Governor Ishrat Hussain visited India in early October at the invitation of RBI Governor YV Reddy. During the visit, he had said Pakistan was open to allowing Indian banks back into the country. The decision to allow banks to start operations across the border was taken during a meeting Prime Minister Manmohan Singh had with his Pakistani counterpart Shaukat Aziz here in November 2004.

Pakistan has moved to liberalise bank ownership norms. Private sector banks now account for 80 per cent of the assets of Pakistan's banking system.

In India, state-run banks account for three-fourths of the banking industry.

The banking community hailed the move. Commercial bankers in India have been pushing the government for restablishing banking links with Pakistan for quite some time. In fact, during the Indo-Pak one-day cricket series last year, ICICI Bank took a team of finance professionals and corporate representatives to Pakistan for close interaction with the country's financial community.

'Our banking relationship with Pakistan started in 1863 when Bank of Bombay opened a branch in Karachi. Another presidency bank, Bank of Bengal, opened a branch in Karachi,' said Abhik Ray, the writer of State Bank's history, volume III, which dealt with Imperial Bank.

Imperial Bank, the earlier avataar of State Bank of India, had as many as 24 branches in Pakistan spread across Baluchistan, Sind, West Punjab and North Eastern Province.

By 1952, most of the offices were closed down for the lack of manpower. State Bank had inherited five branches in Narayaganj, Chittagong, Dhaka, Karachi and Lahore, and all of them were seized by the custodian of enemy property after the 1965 Indo-Pak war. A few branches of PNB, too, were seized.

Similarly, Habib Bank of Pakistan's branch in Mumbai was seized by the custodian in India after war broke out.