A suggestion by the Reserve Bank of India (RBI) that foreign shareholding in new private sector banks be capped at 50 per cent with a lock-in of 10 years has led to some consternation among banks in which a majority share is held by overseas investors. The discussion paper has also triggered a debate if the proposal will make it tougher for banks to attract sufficient capital while ensuring that the shareholding is widely spread.
“RBI wants to be cautious about who are the promoters behind the capital and will push for a broader ownership,” said Monish Shah, director, Deloitte India. “It is closely monitoring the sector.”
The Indian banking sector might require a capital of as much as Rs 5,00,000 crore over the next five to 10 years and the money could come from both domestic and overseas sources, said Shah. As in the case of China, RBI probably wants to ensure that domestic banks are sufficiently strong before it flings the doors wide open to overseas lenders, he says.
“New banks will not face any shortage of capital even if the overseas investment is capped at 50 per cent,” said Shah. “Banks can also borrow in instruments such as subordinated debt, which will not affect the ownership pattern.”
Foreign direct investment rules permit overseas investors to own up to 74 per cent in local banks, including 49 per cent by foreign institutional investors and 24 per cent by non-resident Indians. Lenders owned more than 51 per cent by overseas investors are termed as ‘non-resident-owned banks’.
“Probably, RBI is sending a signal that we need to emphasise more on local talent since the focus for new banks will primarily be financial inclusion,” said Robin Roy, associate director, financial services at PricewaterhouseCoopers India.
“There could be a mismatch in expectations in case of dominant promoters from other geographies.” RBI is seeking wider coverage of banking services in rural areas from the new banks. The average population in rural and semi-urban areas being served by a commercial bank improved to 15,900 as of June 30, from 17,200 in 2005, compared with 9,400 in urban areas from 12,300 in 2005.
“Foreign banks typically go for the low-hanging fruit in Tier-I cities,” said Shah of Deloitte.”The latest permission for new private sector banks is to expand the financial inclusion coverage.”
Indian banks are anyway better suited for this, says Roy of PricewaterhouseCoopers.
“The opportunity in India is so large and hardly any bank in the world has mastered the model for low-cost rural banking,” he said. Private sector banks, including ICICI Bank, HDFC Bank, ING Vysya, YES Bank, Federal Bank and Development Credit Bank, are among lenders that are more than 50 per cent owned by foreign entities.
“It is premature to conclude that RBI will ask banks with 74 per cent foreign ownership to reduce it to 50 per cent,” said Roy. “The increase to 74 per cent has happened over a period. India is unlikely to reverse its policy and impose sectoral caps after permitting foreign investment.”
