Discussion papers on new private banks by July, on greater play to foreign banks by September
Dealing with inflation might be the top priority for the Reserve Bank of India (RBI) at the moment, but that did not deter it from announcing a detailed reforms road map.
The road map includes issuing licences to new players, easing rules for the entry of foreign banks, enhancing infrastructure finance and developing the market for bonds and other financial instruments.
Though RBI, till last October, was against issuing new bank licences, it today unveiled a roadmap for the entry of new players, starting with a discussion paper by July. This will be followed by discussions with stakeholders before guidelines are issued. In addition, RBI said the applications for new bank licences would be referred to an external expert group.
The Annual Policy Statement, released today, once again focused on holding companies for banks, a proposal that has been on the backburner for at least two years. The move will help the likes of State Bank of India, ICICI Bank and Housing Development Finance Corporation to unlock capital to pursue various financial services businesses.
At present, banks or finance companies are working as holding companies and the proposal involved setting up a holding company, with bank being an operating company under it.
Similarly, the review to allow greater play to foreign banks in India -- which was deferred last year in the wake of the global financial crisis – will start soon. While the regulator is planning a discussion paper on the mode of their presence – which can be as a branch, as is the case now, or as a wholly owned subsidiary.
| HIGHLIGHTS # To issue licences to new players # Ease rules for the entry of foreign banks # Enhance infrastructure finance, developing the market for bonds and other financial instruments # Lower provisioning requirements and easier rules for bank investments in infrastructure # Credit default swaps for corporate bonds expected to be in place soon # Sheds conservatism on development of the financial markets |
The paper is expected by September, though the government will need to amend the laws to provide more voting rights and also provide a level-playing filed on taxation. Besides, foreign banks have indicated that they were still some distance away from expanding their overseas balance sheets given that the problems in their home markets have not been fully addressed.
The other focus area was infrastructure, where RBI announced a slew of measures, ranging from lower provisioning requirements to easier rules for bank investments.
There were also steps on the development of the financial markets, and RBI, which has often been criticised for being conservative, shed its conservatism on derivatives. Not only did it allow options in currency futures, it also decided to introduce interest rate futures (IRFs) on five-year and two-year notional coupon bearing securities and 91-day treasury bills. While IRFs, based on 10-year securities, were relaunched last year, it once again failed to take off.
The third element of the derivatives strategy – credit default swaps for corporate bonds – is also expected to be in place soon. By July, RBI is planning to make public the draft report of an internal working group. The instrument, which is a derivative contract based on a loan or a bond of a financial institution, will help lenders hedge their portfolio risks.
Besides, to help the development of the corporate bond and repo markets, RBI has sought the development of a reporting platform. A similar initiative has been proposed in case of certificates of deposit and commercial papers.
