Raghuram Rajan (centre) with RBI deputy governors K.C. Chakrabarty (left) and Anand Sinha in Calcutta on Thursday. Picture by Kishor Roy Chowdhury
Calcutta, Dec. 12: RBI governor Raghuram Rajan today said foreign banks would benefit in the long run if they decided to expand in India.
The RBI had asked foreign banks to set up wholly owned subsidiaries (WOS) and had released a framework on November 6.
The central bank has promised a near national treatment to foreign lenders, which will enable them to open branches anywhere in the country on a par with Indian banks except in certain sensitive areas where they will have to take the RBI’s approval.
However, foreign banks are yet to respond to the RBI’s offer and are concerned about the challenges in setting up and operating rural branches and higher priority sector lending.
Rajan today allayed fears by suggesting that these banks would not have to incur any additional cost other than what they are incurring now. “There are benefits to it (migrating to a WOS system) as the foreign bank study it (the policy framework) over time. One of the interesting benefits they can get is that they can expand a little more. They don’t seem to be interested in that (at the moment). So, that should assuage the concerns of those who worry (if) they should expand too much,” Rajan, who was in the city for the meeting of the central board of the RBI, said.
“As they (foreign banks) explore, they will find many of the costs they already incur. If they have over 20 branches, they already have to meet priority sector norms. There is no additional requirement in the WOS form,” he said.
“Over time they may find benefit of preservation of capital if they go to this form than if they exist in branch form.”
The RBI framework further suggests that if the foreign banks choose to adopt the WOS model, they may enter into merger and acquisition deals with domestic private banks.
However, this will be subject to regulatory approvals.
Rajan said the RBI was not averse to mergers as it could benefit small and medium sized banks in an increasingly competitive environment.
“There are some economies of scale in banking, but beyond a certain size they disappear and diseconomies of scale starts to come in. There has been a lot of talk on bank mergers, between some of the medium sized banks but very little has happened,” he said.
“I don’t think we are averse to these mergers. But if they start assuming a scale we will have to start wondering whether we are getting too many too-big-to-fail entities. At this point of time, there could be some medium and small banks that will benefit from merging. But we will take a view on a case-by-case basis and where we believe there might be risk to stability we will have to intervene at that point,” Rajan said.
He added that the RBI was on track to issue new licenses, but it did not have any fixed number in mind at the moment.