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India opens up its banks, but only
just
By Indrajit Basu
KOLKATA - They waited four years for India
to give them more space, but finally, when the
country did disclose its conditions for foreign
banks, it was hardly worth the wait. On February
28, India's central bank, the Reserve Bank of
India (RBI), through a policy paper called "Road
map for presence of foreign banks in India and
guidelines, ownership and governance in private
banks" finally fulfilled the promise made in 2001
to provide more freedom of operations for foreign
banks in India.
But even as the RBI claims
that the policy allows more space and a road map
for crafting foreign banks' long-term strategies
in a reforming India, foreign banks say that "the
bait is hardly worth the catch".
On the
face of it, the new policy does give unprecedented
elbow room to foreign banks to rejig their
operations. For instance, it allows foreign banks
to establish a presence by either setting up a
wholly owned subsidiary or by converting their
existing branches into a wholly owned subsidiary,
with a minimum equity base of a modest 3 billion
rupees (US$69 million). It also allows foreign
banks, for the first time, to acquire up to a 74%
stake in local private banks, and even lays down
that voting rights in private banks should reflect
the ownership.
"Appropriate amending
legislation will be proposed to the Banking
Regulation Act, 1949, to provide that the economic
ownership of investors is reflected in the voting
rights," the RBI said. In other words, the central
bank wishes to do away with the contentious 10%
cap on voting rights of foreign banks' holdings in
Indian banks that the Indian government imposed
last year.
However, a close scrutiny of
the policy document reveals that the devil is
really in the details. The "next stage of banking
reforms" that this policy claims to have initiated
comes in two phase. In the first phase, March 2005
to 2009, although foreign banks will be allowed to
own a 100% subsidiary, at least half of its board
members will have to be Indian nationals resident
in the country. Moreover, if a foreign bank does
not wish to set up a subsidiary but establish a
presence through acquisitions of privately-owned
Indian banks, it will have to acquire stakes only
in the weak ones that are identified by the RBI as
candidates for acquisitions (the names of such
banks have not been specified yet) and controlling
stakes will have to be bought in "a phased manner
so that Indian banks get sufficient time to
prepare themselves for global competition".
This means that initially foreign banks
can hope to acquire just about 15% in an Indian
private-sector bank, but any larger stake will
need a prior nod from the RBI, "which would be
given taking into account the standing and
reputation of the foreign bank".
Again,
existing foreign banks will need to give up their
branch licenses should they opt for the subsidiary
route. Significantly, all wholly owned
subsidiaries will be treated on a par with the
existing branches of foreign banks for branch
expansion with the flexibility to go beyond the
existing World Trade Organization commitments of
12 branches a year and preference for branch
expansion in under-banked areas. This clause thus
"takes away an obvious benefit for the subsidiary
route", says Jaspal Bindra, general manager, South
Asia, Standard Chartered. According to Romesh
Sobti, country representative, India, of ABN Amro
Bank, "There are no advantages in such a wholly
owned subsidiary model."
There is also
confusion among bankers on the lifting of the 10%
cap on voting rights. "The RBI said that it has
just proposed to lift the cap, but we are not sure
how easy that's going to be," says Sanjay Nayar,
CEO, Citigroup India. "This requires a change of
the country's Banking Regulation Act, which is a
parliamentary procedure that is time-consuming and
tedious."
The second phase commencing in
April 2009, however, is more liberal, and allows
foreign banks to acquire any privately owned
Indian bank. During this phase, wholly owned
subsidiaries, too, can go for listing and foreign
banks may dilute their holding to the extent that
at least 26% of the paid-up capital is held by
resident Indians at all times. The dilution may be
either by way of initial public offering or an
offer for sale. April 2009 onwards, foreign banks
can merge with or acquire any private bank.
Nevertheless, the restrictions of the
first four years have proved to be quite a
dampener for foreign banks. This is why few are
ready to bite the bait just yet. "After studying
the provisions of the new guidelines, we have
decided to pursue more of the organic [through
expansion of existing businesses] growth route in
India. For the time being, the inorganic growth
route [acquisitions] has taken a backseat for us,"
says Sobti. According to Nayar of Citigroup, "On
first impression, the announcement does not
trigger an immediate review of Citigroup's
strategy and plans for India."
Clearly,
the smaller Indian banks, like United Western
Bank, Lord Krishna Bank and Laxmi Vilas Bank, are
relieved that they have been spared the recurrent
nightmares of being gobbled up by large foreign
entities. "Had there been no protection given by
the regulator, foreign banks operating in India
could have had several private sector banks almost
at will," says Tamal Bandhopdhay, a banking sector
analyst, according to whom market capitalization
(number of shares multiplied by the market price
of these shares) of most private-sector banks is
less than the quarterly profits of banking giants
like Citigroup and HSBC.
Bandhopdhay also
adds that Indian banks have at least a four-year
leeway to pull up their socks and put their house
in order. "From April 2009, the regulator's
protection ring will be withdrawn and they will
have to fight it out with the deep-pocket,
technology- and product-savvy foreign banks," he
says. "Foreign banks, meanwhile, can pick up local
banks with the RBI's permission."
The new
policy, which has also stipulated guidelines for
privately owned Indian banks, mandates that all
Indian banks must have a minimum net worth of 3
billion rupees within "a reasonable time frame",
which cannot be more than four years. Thus all
Indian banks with capital bases lower than this
norm (there are at least a dozen of them), would
have to consolidate and grow up. The larger local
banks, too, would have to ramp up both in terms of
size and efficiency in the next four years, not
only to face the competition from foreign banks,
but also to thwart any takeover bids by them.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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