To make Indian banking and financial sector more competitive, should RBI dilute the restrictions imposed on foreign banks?

The World Bank’s Global Financial Development Report 2017-18 recommends the developing countries or the emerging markets to remove restrictions imposed on foreign banks. The same applies for India also. India started drawing its roadmap for foreign banks in 2005 when it sought to first consolidate the public and private sector banks before opening the market for foreign banks. It required being unfolded in a synchronized manner, in phases. The first phase got disrupted with the UPA coming into power. There were two views: while one wanted the amendment of laws to at least allow foreign banks to acquire private banks, the other sought to work with caution as the step could act as hurdle for development of local banks.
But there is also validity in the argument. The big foreign banks have recently started to look for promising and new countries for investment, for which the developing countries provide a perfect prospect. So, there are two benefits. Firstly, these banks can provide the much needed finance to firms and households that national banks are not able to provide. The restrictions hamper these prospects. Secondly, its an undoubted fact that risk of financial instability created by these banks, especially in the countries where the regulations and institutions are not strong. But at the same time the presence of a competitive banking sector can mitigate the situation as it will increase access to basic financial services by the poor.

Topics: GS-III: Indian Economy Issues Relating to Planning