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Indian banking has undergone tremendous changes in the
past decade in terms of factors like technology, asset liability
structure and competitive scenario. Today, many Indian banks
are on a par with their leading Asian counterparts, with
as many as nine Indian banks, led by HDFC Bank and ICICI
Bank, having made it to the list of Top 50 Asian Banks (as
per Asian Bankers Report-2007). However, the cost of banking
intermediation and the extent of banking penetration in
India are still low. As per a technical paper on differentiated
bank licenses released by the Reserve Bank of India (RBI)
in 2007, less than 59% of adult population has access to
a bank account and less than 14% of adult population has
a loan account with a bank.
To meet the growing needs of the banking industry and also
to ensure that this sector becomes a major contributor to
the economy, RBI passed a regulation, allowing foreign banks
to operate in India through one of the three channels: a
branch, a wholly-owned subsidiary, or a subsidiary with
aggregate foreign investment up to a maximum of 74% in a
private bank. In the first phase, i.e., up to March 2009,
foreign banks would be permitted to establish a presence
by setting up wholly-owned subsidiaries or by conversion
of branches into wholly-owned subsidiaries. Alternatively,
they will also be allowed to take over stressed private
sector banks identified by RBI during this phase.
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