The IMF, once a chief proponent of the deregulated financial system across the world and which criticized the developing countries like India for restricting the entry of foreign banks, now describes that India survived the financial crisis because it has restricted foreign banks.
The IMF’s Global Financial Stability Report for October 2012 contains a Chapter assessing the financial architecture of the member countries. The chapter titled ‘The Reform Agenda: An Interim Report on Progress towards a Safer Financial System’ analyses that India and Malaysia along with Australia and Canada were able to survive the crisis because of strong regulation on the working of foreign banks in their domestic economies.
India at present has forty-two foreign banks with branches in limited numbers. The RBI since the last two years is trying to make more regulations and control over the activities of foreign banks. The priority sector lending target for foreign banks has been increased to 42%, which is the same for the domestic banks. Last year, the RBI has brought a discussion paper on the presence of foreign banks in India and declared that it is aiming to have subsidiary model for foreign banks rather than the present branch model. The advantage of subsidiary model is that it will enable the RBI to have better control over foreign banks.
In a later step, the Government declared that it is planning to give tax incentives for foreign banks with subsidiary format in the country. The global financial crisis has revealed the weaknesses of financial regulation in the west and simultaneously proved that many emerging market economies like India has a much sophisticated regulation model than the western countries. This revelation has given confidence to the RBI for strengthening the regulatory set up for foreign banks in India for their safety as well as for the interest of the country. The IMF’s finding about the resilient financial system in the India is recognition of the RBI’s effort.