Indian Gov’t Turns Down Proposal to Reduce Foreign Bank Holdings

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Oct. 25 – A proposal by the Reserve Bank of India to reduce the cap on aggregate foreign holdings in banks to 50 percent, down from the current 74 percent, was shot down by India’s Ministry of Finance in a recent meeting.

The proposal was submitted by the RBI in August, but officials at the MoF’s Department of Economic Affairs found that the institution of such a policy would be inconsistent with India’s overall policy of foreign holdings in domestic equities.

“It would be inconsistent with the overall tenor of liberalization, which is to move in a liberal and minimal interventionist direction,” the DEA said. The RBI representative present at the meeting agreed with the DEA’s assessment.

India instituted its current policy in March 2004, declaring that aggregate foreign investment from all sources in private sector banks should not exceed 74 percent of the paid-up capital of the bank. Furthermore, the policy stipulates that at all times, at least 26 percent of the paid-up capital of a private sector bank will have to be held by Indian residents, except of wholly-owned subsidiaries of a foreign bank.

The RBI’s failed proposal to limit foreign investment to 50 percent was aimed at creating a strong and diversified domestic banking sector and would have included public sector banks, domestic private banks and foreign-owned banks.