Accelerated Role of Foreign Banks in India: Way Forward

Abstract

Banking sector in India is well diversified. Banking sector in India, as a group is categorized as Scheduled Commercial Banks (SCBs). It comprises Public Sector Banks (PSBs) having 70 per cent market share of banking business, New generation Private Sector Banks (NPSBs)- 17 per cent, Old generation Private Sector Banks (OPSBs)- 5 percent, Foreign Banks (FBs) – 6 per cent and others 2 per cent. With financial inclusion on robust expansion mode, banks are set to play greater role in supporting reviving Indian economy. The key challenges in the banking industry revolve around (a) improvement in the asset quality, (b) dipping margins, (c) underused technology led delivery channels, (d) non-optimization of Financial Inclusion infrastructure (e) lack of product innovation (f) changing dynamics of regulatory and government guidelines (g) augmentation of capital to meet Basel –III norms (h) HR -Succession planning, nurturing leadership, Retention and talent management and so on. Recognizing the increased role of FBs in India, RBI released the “Road map for presence of foreign banks in India” in 2005 laying out a two track and gradualist approach aimed at increasing the efficiency and stability of the banking sector. One track was the consolidation of the domestic banking system, both in private and public sectors, and the second track was the gradual development of presence of foreign banks in a synchronized manner. It was followed by RBI issued a discussion paper released in Jan 2011 on the status of FBs and final guidelines were issued in November 2013. This paper brings to fore the role of FBs, performance track record, their business model, collaborative capabilities and projects their future role in the new RBI dispensation. The enhanced role of FBs foreseen by RBI in future due to their immense technological capabilities, capital and knowledge of international best practices earns them a ‘near national status’. The recent guidance of RBI to strengthen the role of FBs is in right direction. Hence, the current move to strengthen their presence in India through mergers/acquisitions, WOS and near National status is a right step that is well poised to develop the core values of Indian banking system.