The Reserve Bank of India (RBI) has decided to run a detailed assessment of the risk-management capabilities and evaluate the transparency in financial affairs of all foreign banks operating in India. The move is aimed at ensuring they do not pose any systemic risk to the banking sector, a senior central bank official told ET.

Till this process is completed, foreign banks are unlikely to be allowed to open more branches in the country.
India has committed to allowing 12 new branches to foreign banks in a year, but has been more liberal so far. There are 32 foreign banks operating in India through close to 300 branches.

This has resulted in a relatively high presence of foreign banks in India. 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 the RBI official who requested anonymity said.

Coming in the aftermath of the financial crisis, the audit perhaps reflects concerns over an unduly large presence of foreign banks creating 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.

A RBI working group headed by Mr Vijaya Bhaskar, which came out with a draft paper on branch licensing norms for banks recently, had skirted the issue of further relaxing the branch expansion norms for foreign banks.

The finance ministry and the central bank had always supported allowing foreign banks to operate in India as they believed that increased presence of foreign banks enhances the efficiency of the domestic banking sector.

The reciprocity issues will be addressed. With our economy expanding, the number of corporates 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.

Officials at foreign banks operating in India, whom ET talked to said that as none of these banks are hard-hit by the financial meltdown central banks exercise will only add credibility to their operations.

In 2005, RBI had released a four-year road map setting out the norms for the presence of foreign banks in India. It was to have implemented the second phasewhere the regulations be further loosenedstarting April 2009 but this was delayed because of the global financial crisis.