By Neha Dasgupta and Sumeet Chatterjee
MUMBAI, Aug 27 (Reuters) - The Indian government should
consider diluting its ownership in state-owned banks to reduce
the country's financial burden and push for consolidation, while
boosting the number of private lenders, the Reserve Bank of
India said in a discussion paper on Tuesday.
The report also reiterated its preference for foreign banks
to establish subsidiaries in India, in a move that is aimed at
ring-fencing their local operations from the overseas parents
and bring them at par with Indian banks in terms of regulations.
At present, all foreign banks including Standard Chartered
and Citigroup operate in India by registering
RBI discussion papers compile thoughts from its various
internal agencies and are meant to solicit outside views that
are then incorporated into a final set of measures. The central
bank set a deadline of Sept. 30 for the feedback.
The long-awaited discussion paper on the RBI's thinking also
supports the need for new entrants into the banking system, in
line with the government's goal to reform a sector dominated by
often lethargic state banks and which only reaches half the
(For full report double click: http://link.reuters.com/mup62v)
"As a prudent economic decision, there is a case for
government to reduce its ownership stake in the PSBs," the RBI
said in the paper, referring to public sector banks.
"There is a need to boost the presence of private banks,
while consolidating the existing public banking system," the RBI
The central bank estimated the government would have to
inject a combined 900 billion rupees ($13.6 billion) over a
period of five years to allow state-run lenders to comply with
Basel III capital requirements.
"Clearly, providing equity capital of this size in the face
of fiscal constraints poses significant challenges," the RBI
Investors have long worried about India's fiscal deficit.
The rupee fell to a record low of 66.30 per dollar on
Tuesday after parliament's approval of a $20 billion plan to
provide cheap grain to the poor renewed doubts about government
resolve to control spending ahead of elections due next year.
The paper also called for a "steady stream" of new bank
entrants that would be considered for approval on a rolling
basis, arguing "continuous authorisation keeps the competitive
pressure on the existing banks and also does not strain the
The RBI is in the process of considering 26 applications
from corporate houses looking to open banks, although it has not
yet provided a timeframe of when the first approvals will be
($1 = 66.2 rupees)
(Editing by Rafael Nam)