Foreign Banks India Foreign Banks in India

Foreign Banks India

Foreign Banks in India

It was recently announced that foreign banks, for the first time in decades, will be allowed to enter into the Indian banking industry and "set up 'wholly owned subsidiaries' in India." ("India Eases Rules for Foreign Banks") Since the nation obtained independence in the late 1940's, the Indian banking system has undergone radical changes, none more so than in the late 1960's when then Prime Minister Indira Gandhi began to nationalize the entire banking system. The effort was an attempt to change the focus of Indian banks from institutions of profit to ones that could aid in the economic transformation of the Indian economy, primarily the development of rural areas. This system of government direction for the banking system kept Indian banks somewhat isolated from the international banking industry. In 2008, when the collapse of the American banking giant Lehman Brothers precipitated a global banking crisis, this system became a buffer that protected Indian banks from the crisis. In effect, the "conservative RBI (Reserve Bank of India) never allowed local banks to take excessive risks and built a safety wall brick by crick around the banking system." (Bandyopadhyay)

The same nationalized system that, in 2008, protected the banking system would in the late 1980's keep the Indian economy small and isolated. Therefore, in 1991 the government instituted a series of steps aimed at liberalizing the Indian economy which included a several-staged plan for the reforming of the entire banking system. Beginning in 2004, India allowed foreign banks to become part-owners in local banks but the next step, the announcement of the beginning of fully owned foreign banks, was only announced in early November. In order to operate in India, foreign banks will be required to have a minimum capital of $80 million, 5 billion rupees. ("India Eases Rules for Foreign Banks") In addition, the Reserve Bank of India also requires that "at least one third of directors to be independent of the bank and at least half to be Indian nationals, with one third residing in India." ("U.S. Business Body Welcomes Indian Banking Sector Reform")

These changes are part of Raghuram Rajan's, the Reserve Bank of India's new governor, attempt "to liberalise the sector as he looks to boost growth." ("India Eases Rules for Foreign Banks") Rajan also wants to increase capital in the country in order to contain inflation, something that has become a major problem in the Indian economy. But the new regulations also have conditions and India will only allow nations that allow Indians to own banks in their nations to enter the Indian sector. As the governor of the RBI stated…reciprocity - your country should allow the same to our own banks…" ("Big Banking Reforms Coming Soon")