The Reserve Bank of India (RBI) has decided to review the status of the financial sector by the year-end to see whether the banking industry is ready for further liberalisation. The move will help foreign banks to enhance presence in India. Originally, the RBI was slated to review the situation in April 2009. However, due to the global financial crisis, the RBI deferred its plans.
A discussion paper on the same would be prepared by September this year.
The RBI, which adopted a two-pronged approach for opening up the banking sector in the country, initiated the process in 2005. Under the first phase —between 2005 and 2009 — foreign banks wishing to establish their presence in India for the first time could either choose to operate through their branches or set up a 100 per cent wholly-owned subsidiary. Besides, foreign banks that have already been in India were allowed to convert their existing branches to wholly-owned subsidiaries.
However, the government, had stressed that consolidation in the banking sector would be critical to open up the sector. The phase of liberalisation comprised strategies related to consolidation of domestic banking system, both in the private and public sectors, while the second phase was aimed at allowing foreign banks to up their presence in a synchronised manner.
“The RBI, while assessing the situation during the latter half of the year could introduce certain clauses especially after the financial crisis, in a bid to avoid any untoward incident,” a government official said.