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RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 08 MUMBAI 000373 
 
SENSITIVE 
SIPDIS 
 
DEPT PLEASE PASS TO USTR 
TREAS PLEASE PASS TO FED 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV IN
SUBJECT: A USER'S GUIDE TO THE RESERVE BANK OF INDIA AND THE INDIAN 
BANKING SYSTEM 
 
MUMBAI 00000373  001.2 OF 008 
 
 
¶1.  (SBU) Summary:  Over the last decade, the Indian banking 
sector has deepened, matured, and grown, and many of its banks 
have become leaders in the new Indian economy.  Moreover, 
foreign banks have also succeeded in expanding in the Indian 
market, and have become a significant part of the banking 
landscape, though their expansion has been limited by 
restrictions.  Nevertheless, with a few notable exceptions, the 
Indian banking sector is dominated by major state-run banks 
which were nationalized almost 40 years ago in order to ensure 
that credit and banking policies served social and development 
goals.  The central bank and banking regulator, the Reserve Bank 
of India, remains conscious of this mission, and continues to 
prize price stability over growth in its monetary and banking 
policies.  The RBI has also proved extremely cautious in 
liberalizing the banking sector, firmly restricting the 
participation of foreign banks and the introduction of more 
complicated financial products.  While there are differences 
between the RBI and the Finance Ministry over the pace of 
banking sector reforms, the RBI is likely to continue a slow, 
gradualist reform agenda, giving prominence to minor tinkering 
instead of major policy changes.  Given that the RBI's 
reluctance to liberalize is now widely seen as a prescient step 
that enabled India to avert some of the most dire effects of the 
global financial crisis, the ideological arguments for more 
financial liberalization have less currency than they once did, 
making it more difficult for governments and the private sector 
to press for additional reforms.  End Summary. 
 
 
 
Indian Banks:  The Legacy of Nationalization 
 
-------------------------------------------- 
 
 
 
¶2.  (U) After Indian independence, the Indian banking industry 
was largely controlled by a number of business houses who used 
banks to apportion credit to select industrial enterprises.  The 
banking sector grew slowly, and according to then-Prime Minister 
Indira Gandhi, was insufficiently responsive to the development 
needs of India, especially for India's rural masses.  Mixing 
socialist rhetoric and shrewd politics, Prime Minister Gandhi 
ordered the nationalization of 14 major private commercial banks 
in 1969, and six more in 1980.  Arguing that banks were not 
fulfilling social and developmental goals, Gandhi directed banks 
to extend credit and provide banking services to the rural and 
urban poor, farmers, and small industries to promote economic 
development.  By the 1990s, the government controlled around 91 
percent of the assets of the total banking sector. 
 
 
 
¶3.  (SBU) Up to the 1990s, the nationalized, or public sector, 
banks (PSBs) grew at around four percent, mirroring the growth 
rate of the Indian economy.  The banks opened up thousands of 
branches and operations in rural areas; regional banks, now 
under a national mandate, expanded into other parts of India. 
Under government direction, these banks continued to follow 
largely social and industrial policies, rather than economic 
ones, lent to rural borrowers and favored industrial projects, 
and offered high interest rate savings accounts to attract 
savers.  The number of bank branches increased from about 7,000 
in 1969 to more than 60,000 in 1994.  The deposit base rose from 
USD 1.04 billion in 1969 to around USD 71.6 billion in 1994. 
However, by 1991, with non-performing loans, bloated labor 
pools, a lack competition and allergic to technology, the Indian 
banking system was saddled with inefficient and financially 
unsound banks. 
 
 
 
¶4.  (SBU) Beginning in 1992, the Indian government carried out a 
wide range of economic and financial reforms, including 
gradualist measures to make the banking system stronger, more 
efficient, and competitive.  Some state-run banks, such as ICICI 
and HDFC, were effectively privatized, and began to grow 
quickly.  Some new private banks were licensed.  The Indian 
government sold equity in PSBs, and divested its ownership to 
raise capital (though current law requires that the Indian 
 
MUMBAI 00000373  002.2 OF 008 
 
 
government own at least 51 percent).  India now has 27 public 
sector banks (where the government owns a majority stake), 22 
private Indian-origin banks, and 32 foreign banks.  (Note: 
There are also several hundred smaller, regional commercial 
banks and rural and urban credit cooperatives.  End Note.) 
Currently, the Indian banking system has a deposit base of 
around USD 837 billion with more than 77,700 bank offices. 
(Note:  The U.S. has a deposit base of about USD 10 trillion. 
End Note.) 
 
 
 
 
 
State-Run Banks Dominate the Financial Landscape 
 
--------------------------------------------- --- 
 
 
 
¶5.  (SBU) The banking sector in India continues to be dominated 
by PSBs.  In March 2009, PSBs accounted for 74 percent of total 
deposits, of which 24 percent came from just the State Bank of 
India (SBI) and its associate banks.  PSBs also account for 
about 74 percent of all bank credit, with SBI holding 23 
percent.  Nevertheless, the Indian banking sectors, and its 
major banks, are small compared internationally.  According to 
"The Banker," a Financial Times publication that rates the 
world's top 1,000 banks, SBI is the world's 64th largest bank 
based on tier I capital and ranks 76th in terms of assets. 
ICICI Bank, India's second largest lender by assets, is the 
world's 81st largest bank based on tier I capital and ranks 
127th based on assets.  Among the top 25 Asian banks (excluding 
Japan) on the basis of tier I capital, SBI ranks 11th and ICICI 
Bank ranks 15th. 
 
 
 
¶6. (SBU) Over the last decade, the health of most Indian banks 
has improved significantly.  For instance, banks have introduced 
new technologies and made significant progress in lowering the 
rates of non-performing loans from a high of 14.78 percent in 
1998, to 2.42 percent in 2009 (sometimes through advantageous 
reclassifications).  Nevertheless, PSBs are still often accused 
of being inefficient, slower and less technologically savvy than 
their private sector rivals, and, sometimes, politically 
pliable, all of which is largely true.  However, there is a wide 
range of health among the PSBs.  Some banks, such as SBI, Punjab 
National Bank, and the Bank of Baroda, are at the forefront of 
modernization efforts.  They now offer more sophisticated 
products to clients, and have a reach into the country side and 
into different income classes that cannot be matched by private 
sector banks.  Moreover, with explicit government ownership and 
patronage, most Indians have grown up believing that PSBs are 
safe and secure places to bank, a feeling confirmed when savers 
returned to PSBs during the first shocks of the financial 
crisis.  Even the most dynamic private sector banks are still 
small compared to the PSBs. 
 
 
 
¶7.  (SBU) Despite this growth, however, only 40 percent of 
Indians have a bank account.  Only 5.2 percent of villages have 
a bank branch.  India's economic policymakers, including the 
central bank and banking regulator, the Reserve Bank of India 
(RBI), have recognized the importance of microfinance and 
microcredit initiatives, and these sectors have grown 
dramatically in the last decade, largely through the efforts of 
dynamic social entrepreneurs.  This large, unbanked population 
makes it difficult to establish identity, target payments, 
reduce corruption, build up credit history, and marshal India's 
high savings rates into productive investments. 
 
 
 
Requirements for Banks in India 
 
------------------------------------ 
 
 
 
MUMBAI 00000373  003.2 OF 008 
 
 
 
 
 
¶8.  (U) The continued dominance of state-owned banks ensures 
that the GoI can carry out its social, industrial, and fiscal 
agenda, and the operating environment for banks in India reflect 
this objective.  Under law, all banks operating in India are 
required to hold a certain proportion of their liabilities in 
government securities.  These mandated ratios, apart from acting 
as a safety net for banking capital, ensure a captive market for 
government securities, and aid government borrowing programs. 
This requirement, known as the statutory liquidity ratio, or 
SLR, is currently set at 24 percent.  The government has at 
times raised the SLR to ensure the government borrowing program 
is conducted smoothly, and has in times of crisis lowered this 
ratio to ensure liquidity in the system.  (A one per cent 
increase in the SLR yields additional demand for government 
bonds of roughly USD 8.5 billion.)  As government securities 
offer an attractive yield - a five-year government bond yields 
around 7 percent - banks often prefer the safety of these 
investments to more risky credit operations.  For much of the 
last decade, banks significantly exceeded the SLR, prompting 
charges of "lazy banking."  RBI guidelines also require that 
banks set aside a certain percentage of their deposits with the 
RBI, known as the Cash Reserve Ratio (CRR).  In addition, 
current RBI guidelines require that Indian banks - both public 
and private -- allocate at least 40 percent of the bank credit 
to certain priority sectors, including exports, housing, and the 
rural and agriculture sectors.  Of this 40 percent, 18 percent 
of credit is exclusively allocated to agriculture and 10 percent 
to "weaker sections" of the economy, including small and 
marginal farmers, landless laborers, and urban and rural 
microfinance. 
 
 
 
¶9.  (SBU) As with the RBI, the Union Ministry of Finance (MoF) 
plays an important role in guiding the banking sector.  The MoF 
appoints the heads of the PSBs and board members, determines the 
amount of government equity, and guides some lending policies. 
A common concern is that the MoF strives to influence credit 
policy in general, especially lending rates.  Banking sector 
observers presume that the Finance Ministry consistently 
pressures state banks to lower interest rates to encourage 
greater borrowing, especially for high-end consumer goods, 
homes, and industrial purposes, though both bank leaders and MoF 
officials deny this.  In practice, despite clear government 
interest in reducing lending rates and reductions in the policy 
lending rates, bank lending rates have stayed in the 11-16 
percent range. 
 
 
The Reserve Bank of India 
 
------------------------- 
 
 
 
 
 
¶10.  (SBU) The Reserve Bank of India (RBI) is the central bank 
of India, and is the regulator and supervisor of the financial 
system.  Led by a Governor appointed by the Prime Minister, the 
RBI is responsible for formulating and implementing monetary and 
credit policy, overseeing foreign exchange, issuing currency, 
and lending to the government.  The RBI has a dual mandate to 
promote economic development - rather than growth - and ensure 
price stability.  In practice, therefore, the RBI privileges 
stability and low inflation over growth.  The RBI believes that 
while economic growth benefits many sectors of the economy, 
inflation hits everyone, and the poorest the hardest.  For this, 
the RBI has a number of "levers" at its disposal, including two 
policy rates - the repo rate and the reverse repo rate - at 
which the RBI lends or absorbs money in the system, and sends 
signals about inflationary or monetary policy trends.  The RBI 
can also use the aforementioned CRR and SLR to absorb or release 
liquidity into the system when credit expands or contracts too 
quickly.  In addition, the RBI can conduct foreign exchange 
operations to mitigate the impact of capital flows on liquidity 
in the banking system or the value of the rupee, both of which 
 
MUMBAI 00000373  004.2 OF 008 
 
 
can affect inflationary trends, credit policy, interest rates, 
and market operations.  In the last several years, the RBI has 
actively used all these tools to control, limit, or encourage 
various market trends, depending on the policy goal.  With so 
many tools, however, the RBI remains in constant "policy 
motion," like the wizard behind the curtain, for the use of each 
lever provokes the need for adjustment elsewhere in the system. 
 
 
 
¶11.  (SBU) On banking, the RBI's philosophy strives for holistic 
growth and development.  The RBI takes seriously its mandate to 
protect banking consumers and the safety of the banking system 
as a whole, and believes that India's financial system should 
serve the overall needs of India's economic development first. 
The RBI displays caution - and sometimes distrust - toward 
entrepreneurial banking and complicated financial products, 
especially those products originating from abroad, and is 
concerned that smart financiers will, if given the opportunity, 
take advantage of the system and of less financially literate 
investors for short-term gains.  To that end, banking guidelines 
require the RBI's approval for all new bank branches to ensure 
that development needs are being met, especially the creation of 
larger rural banking networks, and the RBI scrutinizes the 
introduction of all new financial products. 
 
 
¶12.  (SBU) The previous RBI Governor, Y.V. Reddy (2002-2008) was 
noted -- and often criticized -- for his caution, conservatism, 
and perceived lack of transparency.  Nevertheless, Reddy left a 
lasting legacy as a strong, and independent, central banker who 
presciently helped the Indian banking sector avoid much of the 
tumult of the global financial crisis.  In 2005, Reddy, fearing 
a real estate asset bubble, required banks to raise their risk 
weight ratios for real estate loans, which curtailed some real 
estate lending and limited banks' exposure to a potential asset 
bubble.  In addition, against the advice of the Finance Ministry 
which supported the creation of more innovative financial 
products, Reddy restricted the participation of banks in the 
derivative and asset securitization markets, arguing that the 
Indian financial system was not yet ready for many complicated 
financial products.  In 2003, the RBI imposed tight restrictions 
on banks' ability to trade in interest derivatives which was 
then an exchange-traded product regulated by the capital market 
regulator, the Securities and Exchange Board of India (SEBI). 
The RBI stipulated that trading in interest futures would be 
allowed only for hedging interest risk of their underlying 
government securities portfolio.  He also refused to make other 
pro-cyclical moves, such as lowering interest rates, to 
forestall a borrowing boom and he placed restrictions on India's 
exposure to external commercial borrowings, which, while 
limiting short term growth, reduced Indian corporate exposure to 
foreign loans.  Indeed, many of his most ardent critics have 
grudging praised him for ensuring India's relative isolation 
from the extremes of the financial crisis. 
 
 
 
 
THE RBI in Action:  Management of the financial crisis 
 
-------------------------------------- 
 
 
 
¶13. (U) The current RBI Governor, Duvvuri Subbarao, took over in 
September 2008, as the global financial crisis hit.  The impact 
of the global financial crisis on India was initially 
disorienting, but its overall effect was ultimately much more 
moderate than other major economies.  Through much of 2008, the 
RBI was concerned about rising commodity and oil costs and 
raised interest rates in order to stave off inflation.  The 
Lehman collapse in September, however, caused an immediate 
tightening in global credit markets.  Indian corporate borrowers 
- now unable to borrow in international markets - turned to 
local banks, most of whom were scaling back their lending due to 
concerns over the risks and viability of borrowers.   This 
emergency borrowing - much of it for working capital - forced 
short-term rates to jump and squeezed out lending for many 
smaller companies, who were considered more risky.  For some 
 
MUMBAI 00000373  005.2 OF 008 
 
 
time, trade finance became difficult to secure, which coincided 
with a decrease in demand for India's exports.  And finally, 
foreign portfolio investors began to pull out of India's equity 
markets, withdrawing USD 12.8 billion in a few months, and 
forcing the depreciation of the rupee to new lows. 
 
 
 
¶14. (U) Recognizing India's vulnerability to the global credit 
crunch, the RBI took a number of measures to inject liquidity 
into the system, restore confidence in credit markets, and spur 
banks to lend.  Over a number of weeks, the RBI significantly 
reduced its two policy interest rates, reduced the CRR, and 
lowered the SLR by one percent.  These actions put together 
released nearly USD 50 billion in the economy.  Simultaneously, 
the RBI sold dollars in the forex market to reduce pressure on a 
depreciating rupee.  Due to a shortage of dollars in the forex 
market, RBI created a forex swap facility for banks having 
overseas branches.  The RBI also created special facilities for 
mutual funds facing major redemptions, non-banking finance 
companies, and housing finance companies.  All in all, these 
measures gradually restored confidence in Indian credit markets 
and helping India ride out the crisis, and demonstrated that the 
RBI had the ability to intervene quickly to protect the banking 
sector and credit markets. 
 
 
 
Foreign Banks 
 
----------------------- 
 
 
 
¶15. (SBU) The presence of foreign banks dates back to the 
pre-independence period, but foreign participation in the Indian 
banking system has expanded dramatically only in the last 
decade.  From just a few foreign banks in 1999, there are 
currently 32 foreign banks operating in India, with over 293 
branches, largely in urban areas, performing a wide range of 
services, from investment banking and asset management to retail 
and corporate banking.  (Note:  The RBI issues a single class of 
commercial banking license, so all banks, domestic or foreign, 
are able to offer the full scope of banking operations.  End 
Note.)  Foreign investment in a domestic private bank is capped 
at 74 percent of the bank's capital; no foreign institutional 
investor can hold more than 10 percent, and no bank can hold 
more than 5 percent, with voting rights capped at 10 per cent. 
Foreign direct investment in PSBs is subject to a statutory 
limit of 20 percent per bank.  Some publicly traded Indian 
private banks, such as ICICI, HDFC Bank, Development Credit Bank 
and ING Vysya, are now technically majority foreign-owned. 
(Note:  Currently, the foreign holding in ICICI Bank is 65.6 
percent and in HDFC is 73.85 percent.  End Note.)  The 
prudential norms applicable to foreign banks for capital 
adequacy, income recognition and asset classification are, by 
and large, the same as for the Indian banks, and deposit 
insurance is provided by the Indian government to all savers. 
 
 
 
 
 
¶16. (U) Foreign banks had a 5.9 percent share in total bank 
credit, while foreign banks accounted for 5.2 percent of total 
deposits.  Foreign banks account for 7.5 percent of banking 
assets in India (unlike China, where foreign banks hold only 
about 2 percent of assets).  However, foreign banks are more 
dominant in the off-balance sheet business - such as investment 
banking -- with a market share of as high as 77 percent.  All 
private banks - both foreign and domestic -- have a combined 
market share in the deposits, advances and off-balance-sheet 
business of 23.4, 24.1 and 77 percent, respectively.  Foreign 
banks are considerably more profitable than domestic state-owned 
banks as indicated by a higher return of assets.  In 2008, 
foreign banks had a return of assets ratio of 2.57 as against 
1.01 for nationalized banks and 0.86 for SBI and its associates. 
 In line with these figures, we have been told repeatedly by 
American bank representatives that their operations in India are 
some of their most profitable globally. 
 
MUMBAI 00000373  006.2 OF 008 
 
 
 
 
 
¶17. (U) The RBI has the authority to review and approve the 
addition of any new bank branches, domestic or foreign, and 
foreign banks have long claimed that this policy is 
discriminatory and impedes India's economic development.  In the 
WTO, India committed to permit 12 new bank branch licenses per 
year to foreign banks.  Between 2004-2008, the RBI approved 59 
new foreign bank branches.  During the same period, however, the 
RBI approved the addition of 8525 new branches for domestic 
banks.  However, foreign banks are exempt from some of the RBI's 
lending requirements.  For instance, foreign banks must only 
allocate 32 percent of net credit to meet priority sector 
lending requirements, as compared to 40 percent for domestic 
banks, and are exempt from agriculture and "weaker section" 
lending mandates.  In addition, foreign banks can classify 
export credit as priority sector lending, which is not permitted 
for domestic banks.  Unlike their Indian competitors, there is 
also no regulatory compulsion for foreign banks to open branches 
in rural and semi-urban areas.  In contrast, private banks in 
India must open one out of four branches in rural and semi-urban 
areas after their first five years of operation. 
 
 
 
The RBI's Philosophy: Liberal, Just, and Prudent 
 
--------------------------------------------- --- 
 
 
 
¶18.  (SBU) Traditionally, RBI officials have argued that their 
policy on foreign bank branches is liberal, just, and prudent. 
First, liberal because the RBI has historically granted a few 
more branches than their WTO pledge required.  Second, "just" 
because the RBI is motivated by principles of reciprocity, and 
is more inclined to approve branches for banks whose home 
markets are open to Indian banks.  Third, prudent because as the 
final crisis shows, foreign banks engaged in highly risky 
practices that could have endangered the Indian financial 
system.  More recently, the RBI has further justified this 
caution by pointing to the role of foreign banks in the global 
economic crisis, and the subsequent wave of government bailouts, 
collapses, or mergers.  The RBI considers the risk appetites of 
many foreign banks to be unhealthy, and not in synch with the 
wider social mandates necessary in a developing country like 
India, such as rural lending and soft credit terms to avoid 
NPAs.  (Note:  So far, only one American bank - Citibank - has 
expressed interest in significantly expanding their branch 
network in India.  End Note.) 
 
 
 
Reciprocity: The Key to More Branches? 
 
-------------------------------------- 
 
 
 
¶19.  (SBU) According to the RBI, it reviews the holistic 
strategy for bank branch openings on a yearly basis, and 
approves branches based on overall needs and the perceived 
sincerity of the bank's goals.  Before the crisis changed the 
focus of many international banks, their leaders insisted that 
most foreign banks are keen to assist the RBI in its vision of 
financial inclusion, and offered to open rural branches, along 
with more lucrative urban ones.  During the period when U.S. 
regulatory authorities were evaluating the applications of 
several India banks to open new branches in the U.S., the Indian 
government promised that further bank branches would be granted 
according to the principals of reciprocity.  For instance, after 
signing the 2005 Comprehensive Economic Cooperation Agreement 
(CECA) with Singapore, the RBI allowed Singapore-based DBS bank 
to open 8 branches in India between July 2008 and June 2009. 
Simultaneously, Singapore's central bank allowed SBI to 
establish 4 branches, with more to follow.  However, as U.K. 
government colleagues are quick to point out, the number of 
branches granted to English banks in India has not kept pace 
with Indian branches in the UK, much to their chagrin. 
 
MUMBAI 00000373  007.2 OF 008 
 
 
 
 
 
 
 
The Indian Banking Sector of the Future:  The Roadmap 
 
--------------------------------------------- -------- 
 
 
 
 
 
¶20.  (SBU) In February 2005, the RBI released its banking 
"Roadmap" which laid out the central bank's vision on the future 
development, equity structure, ownership, and governance of the 
banking sector.  In the first phase, between 2005 and 2009, the 
RBI provided that foreign banks could operate in India through 
one of three channels:  branches, wholly-owned subsidiaries, or 
subsidiaries with foreign investment of up to 74 percent in a 
private bank.  During this phase, the RBI said that it would 
also permit individual foreign banks to take greater equity -- 
more than the five percent already allowed -- in "unhealthy" 
domestic banks, on a case by case basis.  With the roadmap, the 
RBI expressed its intention to encourage the consolidation of 
the domestic banking industry - in other words, to promote the 
mergers of lacklustre, smaller, unhealthy private and public 
sector banks with bigger, healthier ones - as a precursor to 
gradually allowing more foreign participation in the Indian 
banking sector.  The RBI pledged to review the implementation of 
these more liberal banking guidelines in 2009, and many foreign 
bankers expected that the RBI would implement new reforms and 
liberalization measures which would expand opportunities for 
foreign banks. 
 
 
 
¶21. (SBU) However, in its update to the roadmap released in 
April 2009, the RBI decided against any additional reform 
measures, citing concerns over the benefits of greater 
participation of foreign banks in India and current global 
conditions, referring to the current financial crises.  In the 
intervening five years, the RBI did not allow any foreign banks 
to takeover unhealthy local banks - never an appetizing offer to 
begin with, since foreign banks would prefer to invest in 
healthy banks as a matter of course - and the RBI was not able 
to engineer the consolidation of some of the most duplicative 
banks during this time period, largely due to opposition from 
bank employee unions, among other reasons - all problems that 
continue today. 
 
 
 
¶22.  (SBU) The RBI's vision of the Indian banking sector 
continues to be far more conservative than the Finance Ministry 
or Planning Commission would like.  Two reports -  the High 
Powered Expert Committee on Mumbai as an International Financial 
Center (2007 - known as the Mistry Report, after its Chairman, 
Percy Mistry) sponsored by the Finance Ministry, and the 
Raghuram Rajan Committee Report (2008) sponsored by the Planning 
Commission - both urged broader financial sector reforms, 
including further liberalization in the banking sector.  The 
Mistry report, focused on an international dimension, and the 
Rajan report, focused on the domestic environment, both 
recommended inflation targeting, a floating exchange rate, the 
creation of liquid bond and derivative markets, and government 
equity divesture from inefficient PSBs, and advocated for 
`principles-based' regulation, rather than rules-based 
regulation.  The Mistry Report also called for full capital 
account convertibility, while the Rajan Report made dozens of 
other small suggestions which would "tweak" markets in the right 
direction without shaking the system.  The RBI, under Governor 
Reddy, largely ignored the findings of these two reports, and 
dismissed the idea of principles-based regulations.  With 
Governor Subbarao, a former Finance Ministry official, at the 
helm, it is too soon to tell whether the RBI will take heed of 
the ideas in these reports.  Already, interlocutors have noted 
that Subbarao has been considerably clearer and more transparent 
in his public monetary policy statements than his predecessor. 
 
 
MUMBAI 00000373  008.2 OF 008 
 
 
 
 
Comment:  Progress Will Be Slow, New Approaches Needed 
 
--------------------------------------------- ---------- 
 
 
 
¶23. (SBU)  As the Indian banking system has liberalized, the 
competition created by the expansion of Indian private sector 
and foreign banks have spurred greater innovation and efficiency 
among the dominant public sector banks.  Nevertheless, large 
numbers of unbanked citizens remain, with access to credit and 
financial products restricted to a relatively small section of 
India's population.  The RBI has exerted prudent, but 
conservative, oversight over the banking sector, favoring price 
stability and gradualism over growth and rapid change.  The RBI 
- and many in the Indian financial sector - believes that the 
central bank's caution in restricting the expansion of foreign 
banks, overseas borrowing, and complicated financial products 
was instrumental in India's avoidance of the worst excesses of 
the financial crisis.  Moreover, the RBI believes that foreign 
banks, in particular, have little to offer India by way of 
domestic credit, financial inclusion, and rural banking, three 
of the central bank's biggest priorities.  By allowing slow, 
gradual reform over the course of many years, the RBI wants to 
ensure that Indian banks - especially laggard state-run ones -- 
will be competitive with foreign banks when more access is 
given.  In doing so, the RBI believes it can influence the 
practices of the Indian banks to ensure that they fulfill the 
country's development priorities.  Therefore, USG arguments that 
greater financial sector liberalization will promote India's 
overall development goals will continue to fall on deaf ears at 
the RBI.  Instead, moving forward, we should remain focused on 
the needs of the wider U.S. financial services sector - and 
other areas, such as infrastructure finance - where some 
progress can be made.  We should also tie our arguments to 
clearly stated Government of India or RBI priorities where 
possibly.  End Comment. 
FOLMSBEE