India’s central bank on Wednesday allowed overseas banks to expand in the domestic market, either through the mergers and acquisitions, or M&A, route or by setting up branches anywhere in the country, in a major policy shift in almost a decade in the banking industry, to boost capital inflows and competition.

According to the new policy announced by the Reserve Bank of India, or RBI, late on Wednesday, foreign banks like Citigroup Inc.(NYSE:C) and HSBC (NYSE:HBC) can enter the long-protected industry by incorporating subsidiaries in India “at par with Indian banks.” However, access comes with preconditions such as “reciprocity with home country of the parent bank.”

“As a locally incorporated bank, the WOSs(wholly owned subsidiary) will be given near national treatment, which will enable them to open branches anywhere in the country on a par with Indian banks (except in certain sensitive areas where the Reserve Bank’s prior approval would be required),” RBI said in a statement.

According to the new framework, foreign banks can invest up to 74 percent -- the cap for overall foreign investment in the sector -- in the banks they choose. RBI, in its statement, noted that the new measure will be beneficial to the banking sector from the perspective of financial stability, as it would create “separate legal entities, having their own capital base and local board of directors.”

“It ensures that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring fenced capital and assets within the host country.”

Foreign banks that began operations in India before 2010 can either choose to operate in WOS mode or through branches, depending on the eligibility criteria set by the RBI for the parent banks and the minimum capital requirement for a WOS is set at 5 billion rupees ($80 million).

The existing rules for expanding the business through branches in the country for Indian commercial banks will be applicable to WOS of foreign banks, RBI said. The central bank has also allowed locally-incorporated subsidiaries of foreign banks to be listed on local bourses.

Experts predict that the RBI’s move could encourage foreign banks to expand their business in India, and increase competition in a sector that has been dominated by state-run banks.

India’s 26 state-run banks account for 74 percent of the total credit and private banks led by ICICI (NYSE:IBN) account for 19 percent, while foreign banks have a 7 percent share in total outstanding loans, according to a report by ICRA, a rating agency.

"It is not a game changer but it brings in new competitive element in the banking sector. It is good not only for foreign banks but also for Indian bank looking at overseas expansion since it is based on element of reciprocity," Robin Roy, an executive with PwC India, told The Economic Times.