The share of foreign banks as a percentage of the assets of India's banking sector currently stands at around 49 per cent against the mandated World Trade Organisation requirement of just 15 per cent.

However, the country has not put any restrictions on the entry of new foreign banks, since it wants a reciprocal gesture as Indian banks increasingly are plan to expand overseas.

RBI Deputy Governor, V Leeladhar, in his speech at the annual Bankers' Conference 2007 here today, said the RBI has not autonomously invoked the WTO commitment to deny licences to new foreign foreign banks, seeking to dispel the impression that the Indian central bank was restricting the growth of foreign banks.

"Our banks are aggressively trying to go abroad. If we are restrictive, our banks will face a problem in getting their proper share of branches abroad. So we have been a little liberal so that we may also get adequate number of branches," the RBI deputy governor said.

Notably, in terms of India's WTO commitment, licences for new foreign banks may be denied when the share of foreign banks' assets in India -- as part of the total assets (including both on- and off-balance-sheet items) of the banking system -- exceeds 15 per cent.

"However, we have autonomously not invoked this limitation so far to deny licences to the new foreign banks even though the actual share of foreign banks in the total assets of the banking system, including both on- and off-balance-sheet items (on a Notional Principal basis), has been far above the limit. The share of foreign banks stood at 49 per cent at end-January 2007, as mentioned in the India's Trade Policy Review, 2007,"says Leeladhar.

The market share of foreign banks in the Indian commercial banking system at end-June 2007 in deposits and advances stood at 6.11 and 6.83 per cent, respectively.

However, foreign banks were far more dominant in the off-balance sheet business with a market share of as high as 72.66 per cent.

Besides foreign banks, there are also two large Indian private sector banks in which the non-resident ownership is very close to 74 per cent permitted, which could therefore be considered as incorporated in India but predominantly foreign-owned banks.

These banks, together with the foreign banks, have a combined market share in the country in the deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent respectively, which, by no means, are insignificant levels.

Furthermore, the share of foreign banks in the foreign exchange market in India is also significant and has registered a rising trend.

For instance, as against their share of 41 per cent in the total foreign exchange turnover during 2005-06, their share during the first half of 2007-08 stood at 52 per cent.

Thus, viewed in totality, it would be extremely difficult to justify the notion that the foreign and non-resident participation in the Indian banking market is insignificant or restricted and that the policy or regulatory environment is not conducive to it, explained Leeladhar.

He said the facts indicate that the regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards, a statement seen as an indication of what's likely to emerge from a review the central bank is scheduled to undertake in 2009 as part of its roadmap for presence of foreign banks in India.

The roadmap had said the RBI would consider granting local branch status for subsidiary banks in India of foreign banks and also stipulate listing of such subsidiaries, but after a review to be undertaken on the situation prevailing then.

Dwelling on why the RBI considers feelings in certain quarters that foreign banks are being discriminated against are unfounded, Leeladhar said India issues a single class of banking licence to foreign banks and does not require them to graduate from a lower to a higher category of banking licence over a number of years, as is the practice followed in certain other jurisdictions.

Also, the single class of licence places them virtually on the same footing as an Indian bank [Get Quote] and does not place any restrictions on the scope of their operations.

Thus, a foreign bank can undertake, from the very first day of its operations, any or all of the activities permitted to an Indian bank and all foreign banks can carry on both retail as well as wholesale banking business.

This is in contrast with practices in many other countries. In addition, no restrictions have been placed on establishment of non-banking financial subsidiaries in India by the foreign banks or of their group companies.

Unlike some of the countries where overall exposure limits have been placed on the foreign-country related business, India has not placed any restriction on the kind of business that can be routed through the branches of foreign banks.

This has been advantageous to the foreign bank branches as the entire home-country business is generally routed through these branches. Substantial FII business is also handled exclusively by the foreign banks.