Foreign banks eyeing entry into India will have to undergo more stringent tests and background checks by the Reserve Bank of India.

The foreign banks that are aggressive back home will be frisked for risks before granting license to operate, an RBI official told Financial Chronicle.

“RBI is trying to analyse balance sheets of banks and get feedback from international agencies like never before for banks who want to set up shops in India,” the official said. According to him, there are few European, Japanese, Chinese and US-based banks that are looking at entering the Indian market.

“In the wake of the economic meltdown that happened, RBI is very cautious about whether the parent bank has more risks on books and the type of business they are involved in,” the official added.

RBI does background checks on all the banks that intend to enter India by analysing balance sheet, valuations, feedback from the central banker of the bank’s main headquarters, from intelligence agencies such as RAW and Interpol for any terror links before granting permission.

“In case of a bank being very aggressive, RBI ring-fences its operations in India so that the risk is not transported to India,” the official said.

The number of applications that RBI got two years back from foreign banks interested in India has come down significantly. The competition commission of Europe has also asked many banks to strengthen their activities in home country rather than spending in overseas markets.

According to the official, many banks were bailed out by their respective governments and central banks, in the wake of economic slowdown. “Hence it is binding on the banks not to expand until the stimulus is withdrawn and debt is paid back.” Many European banks that had applied for licence in India and were granted failed to start their operations in India in past one year and hence their licence has expired.

“Many banks that failed to start operations have converted their branches into representative offices,” the official said, who refused to name the banks.

RBI follows a reciprocator policy where it allows banks from countries where Indian banks have been allowed to open shops. After the economic tornado that was originated in the US engulfed the whole world, RBI has deferred its decision to review the second phase of the roadmap for foreign banks in India till the dust settles.