More Elbow Room For Foreign Banks

After decades of being fringe, foreign banks in India will now get a chance to spread their wings.

Recently, in a communique, Reserve Bank of India (RBI) tweaked its norms on ownership in private banks. First, banks (including foreign banks with branches in India) can pick up to a 10 per cent stake in a local private bank, but in “exceptional circumstances” such as, restructuring of weak banks, or in the interest of consolidation in the banking sector a high level of shareholding will get its nod. Second, even in cases where there are regulatory concerns, a higher stake will be allowed, if the same is backed by the board of the bank. And third, a higher stake will also get the nod if in the opinion of RBI, a change in the ownership is needed.

As on date, there are 22 private banks in operation of which 13 are old — they were all licensed before 1991; some are almost a century old. Many of this older lot have strong community links, but may not be able to source capital as easily as they did in the past. The cost of regulatory capital for banks has gone up hugely across the world after the Lehman crisis; and in Indian context, bad loans, the need for higher capital ahead of Basel-III which kicks in from fiscal 2019, and the viability of their current business models, may hasten the process of consolidation.

While the new norms for private banks shareholding does not mean it is exclusive for foreign banks alone, it has to be seen in context. Of the 30 foreign banks with branches in India, three — Citigroup, Standard Chartered Bank and HSBC — have universal banking interests. Almost 15 years ago, Mint Road did toy with the idea to allow foreign banks more headroom, but that was restricted to banks in distress. Again it’s not that regulations closed such options — the ING Group acquired a stake in Vysya Bank (which now resides in the belly of Kotak Mahindra Bank) — but the times were different. The India story has since caught fire. And some serious foreign banks want to up “India play” as regulations allow for “differentiated banking licenses”.

A shift was signalled by RBI deputy governor R. Gandhi at the Asia Securities Industry and Financial Markets’ Annual Conference in Singapore on 6 November 2014 when he noted: “It is our desire and expectation that foreign banks offer commercial banking with a view to ensure further penetration of banking activities.” In 2011, foreign banks were allowed to set up wholly-owned subsidiaries with “near national treatment”, but few opted given the scepticism over priority sector norms. But by and large, as Gandhi pointed out, “The regulation is non-discriminatory as foreign banks enjoy near national treatment in the matter of conduct of business.”

The plot may well be set to change.