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What is happening in the Indian financial sector? - EY - India

Finesse: November 2010 - February 2011

What is happening in the Indian financial sector?

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The following is a summary of the major developments in India that shaped the four month period ending February 2011:

Regulatory developments

From the Indian perspective, regulatory initiates hogged the maximum limelight during the last quarter. Some of these initiatives could have significant implications on the Indian financial sector opening up further to foreign participation, as well as in the achievement of its all important goal of financial inclusion.

Proposed policy on foreign banks: The RBI proposes to ease the norms applicable to foreign banks in regard licensing new branches, capital requirements and access to the domestic bond market to raise funds in rupees.

However, to avail this near level-playing field, foreign banks will have to operate as wholly owned subsidiaries instead of functioning as their parents' branches. They will need to set up their own board of directors in India, with at least half of the members being Indian nationals who reside in the country.

SEBI has begun conducting investor awareness and education programs in more than a dozen of the country’s small and medium cities and towns.

The proposed measures are aimed at ensuring that the assets of foreign units in India continue to be separate from those of their parents, thereby limiting the ability of the latter to cause instability in the Indian banking system, should things go wrong in their international operations.

The RBI plans to stop issuing new licenses once the assets of foreign banks reach 15% of the total banking assets, to ensure that these banks do not dominate Indian banking. Currently, there are 34 foreign banks operating in India as branches, accounting for 7.65% of the country’s total banking assets (as of 31 March 2010).

  • Regulations of micro finance institutions 
    The RBI plans to take a decision on the implementation of the Malegam Committee’s recommendations on microfinance by the end of March 2011.

    The Committee, which recently released its report, has recommended that microfinance institutions (MFIs) operating with a profit motive should be brought under the purview of the RBI.

    It has suggested the creation of a sub-category for MFIs under the umbrella of non-banking financial companies (NBFCs) to regulate their activities. It had also prescribed a 24% cap on interest rates charged by MFIs.
  • Investor education campaign 
    The Securities and Exchange Board of India (SEBI) has begun conducting investor awareness and education programs in more than a dozen of the country’s small and medium cities and towns.

    This is the first time such awareness programs are being conducted directly by the regulator, and clearly signifies its regulatory intent to spread financial services across the length and breadth of the country. SEBI’s goal is to organize 5,000 such programs in a year.


Conclusion

From a global standpoint, events in Europe will continue to drive global sentiments. In India, some of the expected policy changes, particularly the ones related to foreign banks, are keenly awaited.

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