RBI to audit risk management capabilities of foreign banks before allowing new branches

The Reserve Bank of India (RBI) with an aim to keep check on the foreign banks operation in order to protect the Indian banking sector from any systemic risk, has decided to audit the risk-management capabilities and review the lucidity in financial affairs of all the foreign banks operating in India. This was reported by a senior central bank official.

The sources said first this process will be completed then only foreign banks will be given permission to open more branches in the country.

As per norms regarding allowing foreign banks to open branches in India, India is committed to allow 12 new branches of foreign banks to be opened in a year, but has been more liberal so far. At present there are 32 foreign banks operating in India having around 300 branches.

Thus the liberal attitude of Indian government has resulted in a comparatively high presence of foreign banks in India. An anonymous RBI official told, “Our WTO commitment allows us to deny licenses to foreign banks once their share in the total assets of the banking system exceeds 15%. Though the actual share of these banks has far exceeded that (limit) long time back, India never evoked the clause to provide license”.

Having faced the consequences of the financial crisis, the audit possibly shows the RBI concern over an excessive presence of foreign banks which can generate risks for Indian financial markets. “The detailed audit of the risk management capability of the banks has nothing to do with protectionism,” the RBI official added.

Recently a RBI working group headed by Mr Vijaya Bhaskar, has released a draft paper on branch licensing norms for banks has evaded the issue of further relaxing the branch expansion norms for foreign banks.

On the other hand the finance ministry and the central bank with a view that increased presence of foreign banks will help in enhancing the efficiency of the domestic banking sector, has always supported allowing of foreign banks operation in India.


“The reciprocity issues will be addressed. With our economy expanding, the number of corporate accessing the international markets is also increasing. This requires larger presence of Indian banks overseas. Further licensing and allowing new branches will be based on reciprocity,” said a senior finance ministry official.

The Indian officials working with foreign banks operating in India, told ET none of the foreign banks were badly hit by the financial meltdown therefore central bank’s move will only increase the trustworthiness to their operations.

Previously in 2005, RBI had released a four-year road map in which norms for the presence of foreign banks in India were set. But the second phase was to be implemented in the beginning of April 2009 with more liberal regulations but this process was delayed due to global financial crisis.