India could allow foreign banks to buy local banks

Part of liberalized rules on entry of foreign banks.

Reserve Bank of India governor Raghuram Rajan said RBI will soon come out with the new rules that will ignite controversy among India’s nationalist political parties.

"That is going to be a big opening because one could even contemplate taking over Indian banks, small Indian banks and so on," he said. "We're coming out with details on that in the next couple of weeks."

"By setting up wholly owned subsidiaries, foreign banks will get more opportunities to expand in India," Rajan said. "We will allow you a lot of freedom on branching."

Foreign banks in India today operate as branches of the foreign parent and face restrictions on the number of branches they can establish.

Rajan said the banking sector reforms, especially those easing the entry of foreign banks in a "big way," is part of the five pillars of reforms RBI is going to implement in the next few years,.

"For foreign banks, if you adopt a wholly-owned subsidiaries structure, we will allow you near national treatment," Rajan said. There will a couple of conditions, however.

One condition is reciprocity, meaning that “your country should allow the same to our own banks.” The second is that foreign banks come through one route, either you have a branch or as a subsidiary. RBI will not allow foreign banks to do both routes.