Follow Us:
Thursday, July 19, 2018

Licensing foreign banks: RBI’s caution and a hard lesson

In 1982-83, a couple of years after India negotiated a $ 5-billion loan from the International Monetary Fund, and as the economy started to recover gradually, the government opened up investments in new or existing local companies for Non Resident Indians. Interest rates on foreign deposits were then higher than on domestic deposits, as the […]

Written by Shaji Vikraman | Updated: April 5, 2017 6:08:16 pm
Reserve bank of india, rbi loans, rbi farmer loans, rbi farmer loans subsidy, rbi farmers, agricultural loans, rbi agricultural loans, farmer suicides, In 1991, the BCCI collapsed. It was the biggest banking scam of that period, with claims of $ 20 billion, and led to major litigation.

In 1982-83, a couple of years after India negotiated a $ 5-billion loan from the International Monetary Fund, and as the economy started to recover gradually, the government opened up investments in new or existing local companies for Non Resident Indians. Interest rates on foreign deposits were then higher than on domestic deposits, as the government looked to boost remittances.

Around this time, the Bank of Credit and Commerce International (BCCI) — a foreign bank promoted a decade earlier by the Pakistan businessman Aga Hasan Abedi, with major operations in the UK and Pakistan — sought the approval of the Reserve Bank of India to open a couple of branches in India. The power to grant licences to banks, both domestic and foreign, lay with the central bank, and were laid out in the RBI Act. But to determine the number of branches for foreign banks in India, and to ensure compliance with international rules like those specified by the World Trade Organisation, the Ministries of Finance and Commerce too were involved.

When the application for BCCI’s licence was submitted, Manmohan Singh was Governor of the RBI, and Pranab Mukherjee was Finance Minister in Prime Minister Indira Gandhi’s government. Singh’s predecessor, I G Patel, had recommended to the government to reject a similar application that the bank had submitted earlier. Patel had said that the regulator was uncomfortable about granting approval after receiving reports that the bank was involved in money laundering, financing of terror groups, and other illegal activities.

Share This Article
Share
Related Article

BCCI had been allowed to open a representative office in 1977. According to Singh’s recollections of that period, recorded in a book written by his daughter Daman Singh, on the last day of the Morarji Desai government in 1979, a junior minister approved the opening of a branch of the bank in India. But Singh, who was then the Secretary, Economic Affairs, informed Patel — who was able to get Charan Singh, who headed a minority government as Prime Minister between July 1979 and January 1980, to revoke the order.

In 1983, when called upon to take a decision as RBI Governor, Singh too advised the government against going ahead. The regulator’s informal checks on the bank overseas had indicated that in many jurisdictions, the figure for deposits and loans remained constant. There were also allegations that the bank was involved in financing arms for rebel groups.

But the government wanted the RBI to grant BCCI a licence, and directed it to approve the application. The law on regulators in India — the RBI was the only one in the financial sector at the time — allowed the government to issue directives to them. BCCI was issued a licence.

But the conflict didn’t end. The government took to the Cabinet a proposal to strip the RBI of its power to license foreign banks. Governor Singh protested, and is said to have written out by hand his resignation, addressed to Mukherjee and the Prime Minister. But senior officials in the Prime Minister’s Office stepped in to douse the fire.

According to Manmohan Singh’s account to Daman Singh, he later managed to persuade Indira Gandhi not to implement the decision. But during this entire episode, Finance Ministry officials pointed out that one of the Deputy Governors in the RBI had actually backed the proposal — a revelation that came as a huge shock to the Bank’s management.

Almost a decade later, in 1991, the BCCI collapsed. It was the biggest banking scam of that period, with claims of $ 20 billion, and led to major litigation. The Bank of England was sued by creditors on supervisory or regulatory grounds. In India, the fallout was contained after RBI ringfenced the bank’s operations — by then, Singh had taken over as Finance Minister.

Interestingly, another proposal by an NRI-backed group to start operations of the First Indo International Bank Limited, or FIIB, based in the US, too was turned down in the late 80s on the grounds that it was incorporated in the tax haven Bahamas. BCCI was incorporated in Luxembourg, another major tax haven.

Much later, under the India-Singapore Comprehensive Economic Cooperation Agreement of 2005, the government, then led by Singh, agreed to 20 branches of Singaporean banks at a time when the government’s commitment was to allow 12 branches for foreign banks in India every year. The RBI refused to play ball, and it took two years for a solution to be worked out — after negotiations and a commitment from Singapore to grant licences to a state-owned and a private bank from India.

shaji.vikraman@expressindia.com

For earlier articles in this series, visit the author’s microsite on The Indian Express website, https://indianexpress.com/profile/author/shaji-vikraman/

For all the latest Explained News, download Indian Express App

Advertisement
Advertisement
Advertisement
Advertisement