Foreign banks may be allowed to acquire Indian lenders

The Indian central bank is expected to soon come out with norms allowing foreign banks to take over domestic lenders which can provide for more headroom for international banks to operate in India, RBI chief Raghuram Rajan said in Washington during the weekend.

Rajan said, the banking sector reforms, in particular to those facilitating entry of foreign banks in India in a “big way”, is part of the five pillars of reforms, including monetary policy framework, which RBI was to implement in the next few years, according to a report by PTI.

Speaking to the audience at Washington on Saturday, the new governor of RBI said the policy framework for the entry of foreign banks in India, would be unveiled in the next few weeks.

“For foreign banks, if you adopt a wholly-owned subsidiaries structure and we are coming up with details on that in the next couple of weeks, we will allow you near-national treatment,” he said.

This could fire up the banking sector which had severe restrictions on foreign lenders especially with setting up of new branches as also looking at an inorganic growth strategy.

S&P BSE Bankex index was up nearly 1 per cent in mid-day trades on Monday, outperforming the 30-stock benchmark index S&P BSE Sensex.

However, the banking regulator would look at certain riders while opening the Indian banking space to more foreign competition.

The proposed liberalisation would on a reciprocal basis which means banks of say US-origin would be allowed such a leeway if Indian lenders are also allowed such an expansion opportunity in the US.

Secondly, foreign banks would be allowed to expand in India either through branches or through a subsidiary, in keeping with the regulatory regime.

The RBI had already liberalised branch-led expansion in the country and wants the foreign banks to operate through the subsidiary route. At present, all 43 foreign lenders operating in India use the branch route, without establishing local subsidiaries.

RBI is scheduled to present the quarterly review of monetary policy on October 29. Rajan did not say if intends to announce some of the new proposals on the same day.

The proposed move could provide for an interesting investment opportunity for private equity firms who have already picked the sector for deploying part of their cash. PE firms have backed around one and half dozen Indian banks till date, many of them through secondary market purchase of shares.

Allowing foreign banks to buy Indian lenders could make both old and new generation private sector banks a potential target boosting their share price. PE firms have backed such banks in India.

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