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[March 28, 2006]

Foreign banks to take country roads

(Ecomonic Times, The (India) (KRT) Via Thomson Dialog NewsEdge) Mar. 27--NEW DELHI -- In a move that will give a fillip to the under-banked areas in the country, the government is considering a proposal to allow foreign banks to set up shop in rural markets. And, the proposed relaxation in the policy is already beginning to attract players. Citibank could well turn out to be the trend-setter in the new regime by setting up branches in rural areas. It has applied for 60 new branch licences, of which at least 50 percent will cater to rural markets.


This is a major shift from the stated policy. "It is proposed to go beyond the existing World Trade Organisation (WTO) commitment of a minimum of 12 branches in a year for new and existing foreign banks and to follow a more liberal policy for under-banked areas," a source in the government told ET.The rider to cater to rural markets is part of the central bank's financial inclusion concept to widen the reach of banking services in under-penetrated markets.

As many as 32 foreign banks operate in India through 215 branches. The network will be doubled if these banks are given the mandated 12 branch licences each under the new proposal.ABN Amro has got four new licences to open branches in Kolhapur, Salem, Udaipur and Ahmedabad. The bank will be operating through 28 branches in 21 cities by the end of '06. Citigroup, which has invested nearly $1bn in the country, has 39 branches in 27 cities in India.

Several lobbies including the US and European governments have been pushing for this move in order to be treated on par with Singapore in the run-up to year '09 when the sector will be opened up. Under a treaty signed with Singapore, banks from that country are treated on par with their Indian counterparts and are allowed to enter all banking areas.

However, the applications of the foreign banks are examined on merit before granting permission for opening new branches. This follows the "Road map for presence of the foreign banks in India" issued by the RBI in February '05. Foreign banks are prohibited from owning more than 5 percent of an Indian bank.

In order to operate in India, foreign banks need to obtain a licence under Section 22 of the Banking Regulation Act, 1949. For branch expansion, a licence under Section 23 of the act is required.Foreign banks should lend 32 percent of their net bank credit to the priority sector. They further need to comply with the guidelines on the maintenance of CRR/SLR, prudential norms on income recognition, deployment of foreign funds in Indian business, among other requisites.

According to industry estimates, there are only 28,000 bank branches in seven lakh villages in the country. The National Sample Survey Organisation survey points out that there are only six branches for every 1,00,000 people.

By Priti Patnaik and MK Venu

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