Reserve Bank of India Governor Raghuram Rajan waits for the start of the International Monetary and Financial Committee (IMFC) meeting uring the IMF and World Bank's 2014 Annual Spring Meetings in Washington, April 12, 2014.Mike Theiler/Reuters
Canada's banks generally have shied away from India. An onerous regulatory system and unfamiliar business culture always made a move into what is now the world's 10th-largest economy something short of the slam-dunk investment that Bay Street's famously cautious bankers like.
It may be time for them to take another look – if they aren't doing so already. Raghuram Rajan, India's central bank governor, is leading one of the most forceful efforts to overhaul the Indian banking system in the country's history. He wants it known that outsiders are welcome.
"There was a phase when we were against foreign banks" as a country, Mr. Rajan told me in an interview over the weekend in Washington. "In fact, the [Reserve Bank of India's] philosophy always has been to use the foreign banks to expand the frontiers of technology and improve competition. We very much are for more competition in the banking sector."
If Canada's Mark Carney was the biggest star in central banking in 2013, Mr. Rajan is the profession's Next Big Thing. The former International Monetary Fund chief economist raised interest rates to fight inflation even though economic growth was slowing, generating comparisons to former Federal Reserve chairman Paul Volcker. Mr. Rajan is considering adopting a formal inflation target.
His push to restructure India's economy also includes making the financial industry a "better handmaiden to growth," he said in an interview during the IMF's annual spring meetings. Earlier this year, Mr. Rajan approved two domestic bank licenses, making him the first Indian central bank chief to oversee the creation of new lenders in a decade. Mr. Rajan is rewriting financial regulation to make India more attractive to international lenders. Foreign banks that incorporate in India will face virtually the same regulatory conditions as their domestic rivals. They also would be free to purchase as much as a 74 per cent stake in Indian banks, so long as the foreign share of the banking system stays below 20 per cent of total assets.
"What we want is for foreign banks to come in and bring new ideas, new technology, new innovation to reach more people, to link them to the rest of the world and so on," Mr. Rajan said. "For example, small and medium enterprises in India are desperately trying to link up to the world to export. Banks could provide that link. And a number of foreign banks increasingly are looking at that as a reasonable business to engage in."
Mr. Rajan's move to invigorate the Indian banking system could be of interest the Bank of Nova Scotia, which has branches in Mumbai, New Delhi, Coimbatore, Bangalore and Hyderabad. (No other Canadian bank has any real presence. There currently are 43 international banks operating in India and about 80 domestic lenders.) In its latest quarterly report, Scotiabank bragged of being named North America's best consumer internet bank for a second consecutive year. That's exactly the kind of expertise that Mr. Rajan says would lead to big profits in his country. "If you can build a successful internet bank in India, the size could grow very, very fast," he said.
Mr. Rajan conceded international lenders face some unusual demands from his country. They are required to meet minimum levels of lending to smaller businesses and farmers, for example. Mr. Rajan also acknowledges that his demand that foreign banks set up Indian subsidiaries could appear onerous.
He said that's based on the central bank's responsibility to safeguard financial stability. "I feel much more comfortable about cross-border risk," he said. "I see what I'm regulating and I know there are no hidden liabilities. I would like to keep it as simple as I can…. If I can get them into that, the carrot is, they can do much more."