India opens doors to foreign banks

India plans to allow foreign banks to enter the country and own a greater share in their domestic operating structures as part of an aggressive programme, India’s central bank chief Raghuram Rajan said yesterday.

Talking to Emerging Markets on the sidelines of the Institute of International Finance conference, the Reserve Bank of India (RBI) governor said he was “fully committed” to handing out more licenses to foreign banks that can prove their long-term commitment to India. “Once [a foreign bank has] a locally-owned subsidiary, we will allow them a lot of [operating] freedom.”

More than 40 foreign lenders boast India banking licenses but ownership and capital restrictions have long made it hard for them to gain traction. Earlier this month, RBI deputy governor K C Chakrabarty said foreign banks would be encouraged “to move to a wholly owned subsidiary structure that will enjoy near national treatment”.

Rajan allayed fears that Indian lenders, notably the more hobbled state banks, would suffer from any move to boost outside competition, noting that there are “many good banks in India that are fully able to stand on their own two feet”.

Rajan has made a splash since taking the helm at the RBI in September, hiking the policy repurchase rate to 7.5% from 7.25% in an attempt to counter inflationary pressures

He declined to provide guidance on whether rates may continue upward or follow a lower long-term path: the central bank chief has previously questioned the wisdom of super-low interest rates. “We’ll make a decision about the [right level of interest rates] as and when economic conditions allow,” he said.

The hawkish stance confounded India’s business community but was welcomed by officials aware of the fact that lower prices go hand-in-hand with long-term growth. India’s economy has slowed sharply in recent quarters, from near-double-digit levels in 2011 to less than 5%. In its World Economic Outlook, the IMF tips full-year 2013 gross domestic product to come in at a paltry 3.75%.

Rajan said he was optimistic India’s growth dip was just a blip, pointing to ongoing efforts to cut the current-account deficit to $55 billion in 2013, from $88 billion a year ago. He also signalled his intention to add depth and breadth to India’s shallow capital markets. “We need more corporate debt and government debt issuance, and we need to add depth to the money market and derivatives markets – though these moves may need to wait until all the current turmoil is behind us.”

Rajan also outlined several key financial reforms designed to shake up a semi-complete financial sector. Along a push to issue banking licenses to new local private lenders, Rajan pointed to the importance of instilling greater financial inclusivity in the world’s tenth-largest economy.

“Financial inclusion is our clear aim,” he noted. “The level of technology in the financial sector is tremendous, and we can adapt this to the needs of the banking industry. There are so many Indian villagers that live 10 or 15 hours from the nearest bank branch, so they simply don’t participate in the financial sector. You can bypass that with mobile banking, or people can bank through the local shop.”