India to Allow Foreign Banks Access to Local Markets

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Nov. 7 – After markets closed on Wednesday, the Reserve Bank of India, the country’s Central Bank, announced a series of new regulations that will allow foreign banks much greater access to the country’s domestic market. The domestic market had previously been highly protected against added competition from foreign banks.

In essence, under the new regulations, foreign banks will be treated the same as domestic banks.

In order to be eligible under the new regulations, foreign banks much switch from how they currently operate in India by upgrading from a branch to a wholly owned subsidiary structure. Upon forming the subsidiary, foreign banks are required to invest at least US$80 million (5 billion rupees).

Furthermore, only banks that come from countries that agree to allow Indian banks access to their own markets will be granted these new benefits.

Additionally, once operating as a subsidiary the foreign banks will be required to allocate 40 percent of their lending to the “priority sector,” which includes agriculture and under-served parts of the economy. Domestic banks are already required to follow this regulation – it is hoped that this will funnel money to the lower classes of Indian society and help jumpstart the economy.

Large state banks currently dominate India’s banking system, accounting for more than two-thirds of the banking sector in 2012. In the same time period, foreign banks only accounted for 4.3 percent of deposits. The new regulations seek to foster greater competition and increase efficiency in the financial sector.

For Raghuram Rajan, the governor of the Reserve Bank of India, these new regulations are just one part of a slew of financial reforms to get India’s economy back on track.

“There will be a lot more freedom for foreign banks here. On net, it will be a tremendous opening to them, so I think they should be happy,” said Governor Rajan in a recent interview.

While foreign banks will not be required to change to the new structure, the Indian government hopes that the added benefits on offer will convince the majority of banks to upgrade.

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