SBI may expand to Pakistan soon as central banks explore banking ties

The central banks of India and Pakistan are likely to meet in Karachi later this month to explore banking ties as part of measures to step up bilateral trade between the two nuclear rivals.

The south Asian neighbours, who have been to war three times since independence from British rule, do not allow their banks to open branches in each other's territory.

A decision to open dialogue on this, with the State Bank of Pakistan taking the lead, was taken at the meeting of the Indo-Pak joint working group on economic and commercial cooperation in New Delhi recently.

"The central bank of Pakistan will send an invite to the RBI ( Reserve Bank of India) for holding the meeting by mid-September," a government official told ET.

The two sides had agreed at the commerce secretaries' meeting in April this year that closer cooperation between their banks was important to give a push to bilateral trade and the process of opening branches in each other's country needed to be fast-tracked.

India and Pakistan have signed what is widely considered a path-breaking trade pact that includes grant of most favoured nation, or MFN, status to India, removal of non-tariff barriers, such as strict quality standards by India, cooperation in the power sector and removal of investment barriers.

"It depends totally on the RBI on how they want to proceed on the proposal," the official said.

The two central banks will give inputs to their respective commerce secretaries, who will discuss the issue at their proposed meeting in November.

Although permission to bank in each other's country is likely to boost bilateral trade, the RBI is expected to tread cautiously as the facility could also be used for terror financing.

"There is definitely a concern that the banks could be used as a conduit for transferring money to fund terrorist activities," the official said.

Besides, Indian exporters say any reciprocal access to banks will help Pakistan's exporters more as India already has many national and international banks providing pre-and post-shipment credit.

"Branches of Indian banks there can help make the trade and finance situation better in Pakistan due to better credit facilities, policies and products," Orient Craft chairman and managing director Sudhir Dhingra said.

The current bilateral trade between the two countries is less than $2 billion.

India estimates it could rise to $4 billion if MFN is offered as it would save businesses the trouble of shipping through third countries like Dubai.