India’s central bank for finance, the Reserve Bank of India, is preparing to update rules so that foreign banks can own more of India’s banks. This move is driven by overseas interest in acquisitions and the economy’s need for long-term capital.
Last month, the Reserve Bank of India (RBI) relaxed rules for Japan’s Sumitomo Mitsui Banking Corp to buy a 20% stake in Yes Bank, with other foreign institutions interested in IDBI Bank. It reflects an attempt by foreign parties to relax the rules on owning businesses.
RBI Governor Sanjay Malhotra said that the central bank is studying shareholding and licensing standards. According to the source, the RBI could permit larger interests by regulated financial institutions on a case-by-case basis and improve rules to benefit foreign acquisitions.
Experts say that overseas banks are interested in investing in India, partly because India is pursuing trade agreements with neighbouring regions that could attract more lenders.
“The interest is driven by India’s strong economic growth and large under-penetrated market,” said Madhav Nair, deputy chairman of the Indian Banks Association.
Regulators believe India is not evolving as rapidly as other big economies in getting banking capital, a key factor for continued growth. Alka Anbarasu from Moody’s noted a greater need for banking capital in the medium term.
“If this prompts the regulator to consider bringing in strong international players, it would be a good rationale,” she stated.
Even though Citibank, HSBC and Standard Chartered have a presence in India, they prioritise making profits in areas other than core lending. Only about 4% of all bank loans in India are held by foreign banks.
Foreign investors may not own more than 74% of a bank’s shares, and its own strategic investors are limited to 15%. Other limits, such as a 26% voter cap and the need to divest large portfolios within 15 years, discourage institutions based outside the country even more.
RBI is reviewing the possibility of extending the period for foreigners to sell their investment shares. In particular, the regulator has become more open to allowing larger cases to deal with exceptional events, such as agreeing to the 15% limit for Yes Bank.
