RBI Paves Way for Consolidation in Private Banks

CENTRAL BANK'S relaxation of rules likely to broaden shareholder base and lead to better quality governance

Wealthy individuals and finance companies can pick up more equity in private banks while non-state lenders struggling to make money could emerge as acquisition targets for those on the hunt, following the Reserve Bank of India's recent relaxation of rules aimed at shoring up capital and encouraging consolidation.
Analysts said lenders of interest may include IndusInd Bank, Yes Bank, Kotak Mahindra Bank, Karur Vysya Bank, Lakshmi Vilas Bank, Tamilnad Mercantile Bank and Dhanlaxmi Bank. Banks and investors could not be immediately reached for comment.

Foreign institutions that hold 5% or less in private sector lenders have already started thinking about raising their stakes, said two executives with knowledge of the matter.

“The move from RBI could broaden the shareholder base and may in turn lead to better quality governance since there would be active investors on the board demanding perfor mance,“ said Ashvin Parekh, a banking and finance consultant. Individuals and non-financial entities such as high net worth individuals can acquire up to 10% in a private bank directly, up from 5%.

Non-regulated, non-diversified and non-listed entities such as holding or investment companies owned by financial entities can acquire up to 15%. While foreign banks will be allowed to acquire up to 10%, the RBI may allow a higher stake in troubled lenders in order to protect depositors.

“Institutional and individual investors with sound understanding of financial services were capped and relaxing that cap will allow for increased equity holding by informed investors,“ said Jaspal Bindra, Centrum Group executive chairman.

The increased investment limit opens up opportunities for seasoned bankers such as Bindra and former Citigroup head Vikram Pandit to pick up stakes in banks. “The RBI move would be the best proxy for foreign banks to play among Indian private sector banks,“ said Sanjiv Bhasin, executive vice president, markets and corporate affairs, IIFL. “Wealthy investors, too, are likely to increase bets on them, expecting some consolidation bids in the space.“

Among foreign institutions that hold 5% or less in private lenders are Canada Pension Plan Investment Board, National West minister Bank plc , Europacific Growth Fund , Franklin Templeton Investment Funds, Capital World Growth and Income Fund, DB International (Asia), show data from BSE.

“Private equity firms, which are not regulated, could be eligible for picking up 15% in banks,“ said Abhishek Bhattacharya, director and co-head, financial institutions, India Ratings. “A lot of corporate houses, which are not financial institutions as per classification, could be eligible under the legal persons category .“

The RBI said that the move was aimed at facilitating the need for additional capital for lenders because of the implementation of more stringent Basel III norms.

The move comes as RBI intends to issue more banking licences on tap and some foreign banks are contemplating the establishment of wholly owned subsidiaries in India.

The Economic Times New Delhi,16th May 2016