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Annual Policy Statement for the Year 2010-11 click here

Annual Policy Statement for the Year 2010-11- 20th April 2010

Part B. Development and Regulatory Policies

V. Regulatory and Supervisory Measures for Commercial Banks

Presence of Foreign Banks

98. In February 2005, the Reserve Bank had released the ‘roadmap for presence of foreign banks in India’ laying out a two-track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India. The first track was the consolidation of the domestic banking system, both in the private and public sectors, and the second track was the gradual enhancement of foreign banks in a synchronised manner. The roadmap was divided into two phases, the first phase spanning the period March 2005 – March 2009, and the second phase beginning after a review of the experience gained in the first phase. In the first phase, foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100 per cent wholly-owned subsidiary (WOS), following the one-mode presence criterion. Foreign banks already operating in India were also allowed to convert their existing branches to WOS while following the one-mode presence criterion. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion in India. No foreign bank, however, applied to establish itself as a WOS or to convert to a WOS during the first phase.

99. When the revision of presence of foreign banks in India was due in April 2009, the global financial markets were in turmoil and there were uncertainties surrounding the financial strength of banks around the world. Accordingly, the Annual Policy Statement of April 2009 indicated the intent to continue with the current policy and procedures governing the presence of foreign banks in India and to review its roadmap after due consultation with the stakeholders once there was greater clarity regarding stability and recovery of the global financial system.

100. While global financial markets have been improving, various international fora have been engaged in setting out policy frameworks incorporating the lessons learnt from the crisis. Some of the lessons from crisis are to avoid organisational structures which become (i) too big to fail and (ii) too complex to fail. Furthermore, while there is a realisation that as international agreement on cross-border resolution mechanism for internationally active banks is not likely to be reached in the near future, there is considerable merit in subsidiarisation of significant cross-border presence. Apart from easing the resolution process, this will also provide greater regulatory control and comfort to the host jurisdictions. Drawing lessons from the crisis, it is proposed:

to prepare a discussion paper on the mode of presence of foreign banks through branch or WOS by September 2010.

Licensing of New Banks

101. The Finance Minister, in his budget speech on February 26, 2010 announced that the Reserve Bank was considering giving some additional banking licenses to private sector players. NBFCs could also be considered, if they meet the Reserve Bank’s eligibility criteria. In line with the above announcement, it is proposed:

to prepare a discussion paper marshalling the international practices, the Indian experience as also the extant ownership and governance (O&G) guidelines and place it on the Reserve Bank’s website by end-July 2010 for wider comments and feedback. 102. Thereafter, detailed discussions will be held with all stakeholders on the discussion paper and guidelines will be finalised based on the feedback. All applications received in this regard would be referred to an external expert group for examination and recommendations to the Reserve Bank for granting licenses.

Introduction of Bank Holding Company (BHC)/Financial Holding Company (FHC) in India

103. The Reserve Bank placed a Discussion Paper on Holding Companies in Banking Groups on its website in August 2007 for public comments. The feedback received on the Discussion Paper underscored the need for introduction of bank holding companies (BHCs)/financial holding companies (FHCs) in India to ensure an orderly growth of financial conglomerates and better insulation of a bank from the reputational and other risks of the subsidiaries/affiliates within the group. The Committee on Financial Sector Assessment (CFSA), in its report issued in March 2009, observed that given the lack of clarity in the existing statutes relating to the regulation and supervision of financial holding companies, the holding company structure as prevalent in the US for financial conglomerates is not currently in use in India. The Committee noted that the absence of the holding company structure in financial conglomerates exposes investors, depositors and the parent company to risks, strains the parent company’s ability to fund its own core business and could restrict the growth of the subsidiary business. Considering the complexity of the issues involved and implications of the BHC/FHC model for the financial system in general and banking system in particular, it is proposed:

to constitute a Working Group with the representatives from the Government, the Reserve Bank, the SEBI, the IRDA and the IBA to recommend a roadmap for the introduction of a holding company structure together with the required legislative amendment/framework.

Conversion of Term Deposits, Daily Deposits or Recurring Deposits for Reinvestment in Term Deposits

104. As per extant guidelines, banks should allow conversion of term deposits, daily deposits or recurring deposits to enable depositors to immediately reinvest the amount lying in the aforesaid deposits with the same bank in another term deposit. Banks are required to pay interest in respect of such term deposits without reducing the interest by way of penalty, provided that the deposit remains with the bank after reinvestment for a period longer than the remaining period of the original contract. On a review of the extant regulatory norms and in order to facilitate better asset-liability management (ALM), it is proposed:

to permit banks to formulate their own policies towards conversion of deposits.

Compensation Practices

105. It was indicated in the Second Quarter Review of October 2009 that in line with the steps taken by global community, particularly the initiatives taken by G-20 nations, the Reserve Bank would issue guidelines to private sector banks and foreign banks with regard to sound compensation policy. Accordingly, it is proposed:

to issue comprehensive guidelines based on Financial Stability Board (FSB) principles on sound compensation practices by end-June 2010.

106. The guidelines will cover effective governance of compensation, alignment of compensation with prudent risk-taking and disclosures for whole time directors (WTDs)/chief executive officers (CEOs) as well as risk takers of banks.



Click Here For Highlights of Annual Policy Statement for the Year 2010-11

Click Here For Macro economic and Monetary Developments : 2009-10

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