The prime minister and finance minister appear to be on the verge of a deal with Left parties to allow greater FDI in banking. Foreign companies directly help by investing in India, generating employment and introducing better practices. They are equally important in raising the performance bar for domestic companies. Excuses about national security had blocked FDI from coming into telecom. Similarly, FDI in banking has been opposed on the grounds that foreign banks might flee the country in the event of a banking crisis. Yet, a banking crisis is more likely to come out of poorly supervised PSU banks and cooperative banks!The NCMP contains a promise to increase competition in the financial sector. Banking, in particular, is an area with genuine failures of competition policy. Few banks get started, fewer shut down. This violates the hallmark of competitive markets, where companies must be put under constant pressure for their survival in order to ensure high levels of efficiency. If banking in India is slothful, this is directly because RBI has blocked competition in banking. The NCMP is on the right track in proposing that this is a flaw in the policy framework that needs to be addressed. Other than some of the new private sector banks, this sector has few world-class firms, unlike Indian manufacturing which has improved greatly in response to economic liberalisation.FDI in banking of 74 per cent implies that a foreign bank would be able to have a 74 per cent stake in an Indian private bank. Through this, the foreign bank would have a direct interest in improving its Indian partner and greater knowledge flows into India would take place. However, as important are the issues of greater direct participation by foreign banks. India is pursuing archaic policies. A McDonald’s is able to freely open branches but Citibank has to go back to RBI for each branch opening, and RBI permits only 12 branches per year. The next step is to remove this limit. Indian banking can only be as good as India’s banking regulator will allow it to be. Reforms of the banking regulator should now occupy the UPA government.
