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Govt may allow 100% FDI in pvt sector banks soon

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Private sector lenders, including ICICI Bank, HDFC Bank and Axis Bank, may soon have the option of turning into fully-owned foreign banks, with the government reconsidering a proposal to allow up to 100% foreign direct investment (FDI) in private sector banks.
 
The move is likely to be a breather for the struggling banking sector, which has been reeling under the rising weight of bad loans, sources said.
 
The government currently permits 74% FDI in private banks, with up to 49% allowed under the automatic route. Foreign holdings beyond 49% need to be cleared by the Foreign Investment Promotion Board (FIPB). Among the leading private lenders, the foreign holding in Kotak Mahindra Bank is now at 69.8%, in ICICI 
 
Bank at 65.27%, in Axis Bank at 50.6% and in HDFC Bank at 48%. The move to raise the FDI ceiling will help them, as well as the upcoming payments and small finance banks, tap overseas markets to raise their capital base.
 
The Department of Industrial Policy and Promotion (DIPP) had, last year, moved a proposal to allow 100% FDI in the sector. But the Reserve Bank of India (RBI) turned it down on the ground that banking was a sensitive sector, and significant shareholding by foreign institutional investors (FIIs), who have a tendency to make short-term investments, could enter or exit a stock for a short duration largely to book profits. That would have caused uncertainty for banks and account holders.
 
In fact, RBI governor Raghuram Rajan has himself expressed reservations against opening up sectors fully to foreign investment. “The most stable form of financing, FDI, has the additional benefit of bringing in technology and methods. But India should not be railroaded into compromising its interests to attract FDI,” Rajan had said last year in a commentary posted on the website of Project Syndicate. “Any signs of growth can attract foreign capital, and if not properly managed, these flows can precipitate a credit and asset price boom and exchange rate overvaluation,” he had said.
 
But with Rajan’s term expiring in September, and a new governor in office, the Centre is looking for a consensus on the issue, the sources quoted above said.
 
The government is keen on foreign banks setting up subsidiaries in India. Almost all foreign banks operating in India, including Citibank and HSBC, operate as branches. In 2012-13, RBI came up with a proposal to allow these banks to operate as subsidiaries, but banks have been reluctant to create subsidiaries because of the extra capital they will need to set aside. Abolishing the 74% FDI limit will also help the government achieve this.
 
Private banks also want a higher ceiling, sources added.
 
Experts see the move as positive for the banking industry.
 
“The proposal is good for the sector but the government has to build in safeguards and riders so that the economic interest of the country is protected,” said Naresh Makhi Jani, head of financial services, KPMG India.
 
Hindustan Times, New Delhi, 19 July 2016

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