Last month, the Reserve Bank of India (RBI) relaxed its regulations to permit Japan’s Sumitomo Mitsui Banking Corp to purchase a 20% stake in Yes Bank. Additionally, two foreign entities are competing for a stake in IDBI Bank, emphasizing the push to relax foreign ownership regulations, which are among the most stringent globally.
RBI Governor Sanjay Malhotra mentioned in the Times of India last week that the central bank is reviewing shareholding and licensing regulations for banks as part of a comprehensive evaluation.
A source familiar with the central bank’s considerations indicated a willingness to allow regulated financial institutions to hold larger stakes on a case-by-case basis, alongside modifications to rules that could alleviate barriers to foreign acquisitions.
Analysts suggest that foreign banks are eager for opportunities in India, the fastest-growing major economy in the world, especially as it seeks regional trade agreements. Such deals could present new prospects for global lenders across Asia and the Middle East.
”The interest stems from India’s robust economic growth and significant under-served market,” stated Madhav Nair, deputy chairman of the Indian Banks Association.
Indian regulators express concern that the country is falling behind other large economies in securing banking capital, which is crucial for maintaining swift economic growth.
According to Alka Anbarasu, associate managing director at Moody’s Investors Service, India will require significantly more capital for its banking sector in the medium term.
”If this has led the regulator to contemplate inviting strong international players into the banking system, it would certainly be a justifiable reason to do so,” she remarked.
While major global banks like Citibank, HSBC, and Standard Chartered operate in India, they typically concentrate on more lucrative corporate and transaction banking, as well as trading, rather than standard lending practices.
The share of foreign banks in India’s outstanding bank credit is less than 4%, as indicated by central bank statistics.
Banking remains one of the most protected sectors within the Indian economy. Although foreign portfolio investors can own up to 74%, regulations restrict a strategic foreign investor’s stake to 15%.
Foreign banks also face challenges from a complex array of other regulations, including a 26% limit on voting rights and a stipulation that any large holdings by a strategic investor must be reduced to 26% within 15 years.
The RBI is reportedly open to extending the timeframe for foreign buyers to reduce their stakes, according to the knowledgeable source. This source requested anonymity due to the confidential nature of the discussions.
The RBI has not responded to an email seeking comments.
The source also noted the banking regulator’s increased willingness to provide case-by-case exemptions from the 15% ownership limitation, as seen in the Yes Bank acquisition. The $1.58 billion transaction was the largest cross-border acquisition recorded in India’s financial sector.
Two foreign investors, Canada’s Fairfax Holdings and Emirates NBD, are also looking to acquire a 60% stake in IDBI Bank, which is government-owned.
Emirates recently obtained regulatory approval to establish an Indian subsidiary, marking it as only the third significant foreign bank to do so, following Singapore’s DBS and the State Bank of Mauritius.
This decision was influenced by an aspiration to acquire a majority stake in IDBI Bank, a source with knowledge of the buyers’ motives explained.
Emirates NBD declined to comment, while Fairfax did not respond to a request for remarks.
An adjustment to the 26% cap on voting rights or the 15% investment limit could entice foreign bank investors, according to a note from ratings agency Fitch last week.
Fitch believes the RBI is favoring foreign banks with strong performances and solid governance to acquire stakes larger than 26% through wholly-owned subsidiaries regulated in India.
The knowledgeable source mentioned that the voting rights limitation is enshrined in law and would require review by the finance ministry.
Regarding regulatory matters within the central bank’s domain, the source added that the approach toward foreign strategic investors may need reassessment, particularly considering the domestic investors’ lack of interest in managing banks.
”The source of long-term capital will need careful consideration,” the source remarked.
