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Indian Banks : Safe and Sound in a Protected Economy

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17 March 2009

Indian banks enjoyed a competition-free era, operating under a protectionist regime, till 1991. The competition from private and foreign banks was hardly noticeable till the government liberalized the Indian economy in 1991. Ever since, the number of foreign banks has grown considerably and currently India has 29 foreign banks operating with around 277 branches and 1034 ATMs (as of March 2008). With the announcement of further liberalization on the cards, how has it affected the local banks?

In 2004, Reserve Bank of India, the central banking authority, announced the roadmap for the presence of foreign banks in the country. During the first phase, between March 2005 and March 2009, foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. At the end of the first phase, the government would conduct a review and decide on the further actions related to the extension of the national treatment to WOS and permission for mergers/acquisitions of any private sector banks in India by a foreign bank. In a way, this move has been a boon to the Indian banking system, as the local banks have vastly improved their banking processes and services in order to compete with the private and foreign banks. While it is unlikely that the foreign banks would compete in the rural and semi-urban segment, they have captured a good percentage of the urban customer base, from the public sector banks, with their customer-centric operations.

As of last year, many foreign banks were keen to open branches in India, including Royal Bank of Canada and Glitnir, an Icelandic bank. The public sector banks in India like Bank of Baroda and Canara Bank underwent rebranding exercises and image makeover, anticipating competition from foreign banks. However, one set of words played a spoilsport on all such plans : Global Financial Crisis.

As a result of the crisis, many foreign banks in India are reworking their strategy. Some of the banks, like Royal Bank of Scotland (ABN AMRO) and Citibank, are trying to sell off their India businesses. The Reserve Bank of India, which had proposed the review, may not ease the current norms, considering that it would open the financial system to the banks which have been faring badly in other countries. For the time being, the local banks can heave a sigh of relief and concentrate on their own expansion. With the General Elections happening in the next couple of months and a possible change in the government, the proposed liberalization policies may not see the light of the day in the near future.

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