After the global financial turmoil hit some major banking players, Reserve Bank of India (RBI) has decided to put off the proposal to allow foreign banks to acquire controlling stake in private banks. The government officials said that the apex body would make this announcement in its annual monetary policy report.

Earlier RBI was expected to allow foreign banks to acquire stakes in Indian banks from April 2009 as a part of the second phase of the banking sector's opening up plan, termed ‘Roadmap for presence of foreign banks in India'.

However the collapse of some banks and recapitalization of others in the US and Europe has cautioned RBI to defer its plans. "The failure of foreign banks here can pose a threat to the Indian banking system," said a senior official.

The opening-up plan during the initial stages of roadmap allowed foreign banks to start wholly-owned subsidiaries (WOS) or convert the existing branches into subsidiaries. In the second phase, the apex bank was expected to give national treatment to these foreign subsidiaries and permit them to dilute their share and take over private banks.

RBI has recently pointed out that the opening up of the banking sector was not appropriate at the current scenario due to the global financial conditions and therefore it would decide on the time when the current status can be reviewed and the second phase of roadmap can be implemented.

An official from RBI said, "India has remained largely unaffected by the global banking crisis due to the strong regulatory norms that Indian banks follow. But to oversee the foreign banks and their offshore operations would be impractical."

As per the current RBI regulations, foreign banks that want to open subsidiaries in India should satisfy the apex body that they are under prudential supervision in their home country and thereby get an approval from their respective banking regulator.

There are various banks from China, Japan and the Middle East that have showed interest in buying controlling stake in Indian banks in the past. These banks are expected to wait for sometime as the RBI plans to defer the proposal.

Presently there are 280 branches of foreign banks and 8,265 branches of private commercial banks in the country.