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Friday, February 18, 2011

Limitations of Indian banks' branching out abroad

During the early years it was not very easy for an Indian bank to open overseas branches, though the Reserve Bank of India was vested with the powers to allow them to open overseas branches. Policymakers took into account a number of factors and not all of which are purely commercial.

The process required RBI to consult a number of departments within its own organisation and other ministries through the nodal finance ministry.

Given the multiple considerations, RBI did not attempt to frame any definitive policy or guidelines in regard to the opening of branches or offices abroad by Indian banks till almost the onset of the 1980s, according to the notings in the third volume of the Reserve Bank’s history.

Many banks which attempted to open offices overseas did not get the regulator’s nod. In 1963–64, Punjab National Bank as well as Bank of India applied for opening offices in the United States but RBI did not grant them permission on the ground that requests could in turn come from US banks to open offices in India.

In 1964, Bank of India sought permission to open offices at Hamburg, Dusseldorf and Milan but these requests too were turned down on the ground of possible application of the reciprocity principle, which, at that time, was considered undesirable from the exchange control angle, i.e., having to permit remittance of profits by branches of foreign banks as well as from the point of view of its adverse effect on the expansion of business of Indian banks within India.

Three major elements influenced the Reserve Bank’s policy towards Indian banks opening offices abroad till the early 1970s. First, there was the question of foreign exchange for meeting the capital requirements and other expenses connected with the setting up of an overseas offices. Given the scarcity of foreign exchange reserves, RBI and the government were concerned about the foreign costs.

Second, there was the issue of business potential. This was related to the number of persons of Indian origin residing in the country in question. The perception was that the branch or office abroad would grow in size if it was supported by a large number of ethnic Indians.

Third, there was the principle of ‘reciprocity’


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