India will not allow a greater role for foreign banks in the Indian banking system when the review of the next round of banking reforms begins later this year because of uncertainties surrounding the current global financial crisis.

"Banking is one area that is very uncertain globally. When you are talking about global banks coming in, you have to wait. That is not an area where I would push for more action," Arvind Virmani, chief economic advisor, finance ministry, told Business Standard.

The second phase of reforms was expected to address areas like extending 'national treatment' to foreign banks, which means that foreign banks would be treated on a par with Indian ones under the World Trade Organisation agreement.

Other items that are to be considered include permitting listing foreign banks' wholly-owned subsidiaries in India and the acquisition of sound Indian banks by foreign banks.

"When you are talking about foreign banks coming in, you are talking about the banks that are failing right now. That's a legitimate concern," he added.

During the first phase of reforms, between March 2005 and March 2009, foreign banks were permitted to establish a presence by way of setting up a wholly-owned banking subsidiary or converting branches into such subsidiaries.

Given the cost structures, levels of disclosure and supervision and tax, however, foreign banks did not see value in doing this and continued to operate through branches. Under the WTO agreement, India committed to allow foreign banks to open 12 branches in a year.

"Banking is the segment that has been most affected by the global meltdown. Banks are failing in the US and India should wait till things clarify," Virmani said.

"There is a legitimate issue of higher risk and regulation. For every reform, there is always risk. One has to make judgements. So, there are some issues like global banks coming, which are now higher risks. But there are other issues where there is no change in risk. We should move forward," he added.

India will, therefore, push other financial sector reforms like voting rights proportionate to ownership in private banks (it is currently capped at 10 per cent irrespective of shareholding) and higher foreign capital participation in domestic bond and futures markets.

The finance ministry is also pushing for financial sector reforms that will increase the efficiency of intermediation. Given India's high savings rate the focus of the reforms would be to channel these into investments at low cost.

"We have a whole bunch domestic markets which we have to create like a repo market for bond and futures. Voting shares (in private banks) should be raised. That is where we should move forward," he said.

"My view of it is that financial sector reforms are very urgent now. If we want to get back to the high growth path, we have to move much faster on financial sector reforms," Virmani said.

Ten years have passed since these reform issues were raised in 1999. "Perhaps the harm was not that much earlier when you had the capital flows. But now with global deleveraging and so on capital flows are going to be restricted perhaps for several years, certainly for next year and couple of years more," he added.