Allowing for more parity in the nation’s banking sector, the Indian central bank says foreign players will be able to acquire Indian domestic private sector banks provided they set up wholly-owned subsidiaries (WOSs) in the country.
Such entities can also list on Indian stock exchanges and set up branches anywhere in the country, the Reserve Bank of India (RBI) announced on Wednesday.
“As a locally incorporated bank, the WOSs will be given near national treatment, which will enable them to open branches anywhere in the country on a par with Indian banks (except in certain sensitive areas where the Reserve Bank’s prior approval would be required),” according to the RBI guidelines.
However, a foreign bank subsidiary will not be allowed to hold more than 74 per cent – the sectoral cap for overall foreign investment – in the private banks they may acquire.
“The issue of permitting WOS to enter into merger and acquisition transactions with any private sector bank in India subject to the overall investment limit of 74 per cent would be considered after a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks (branch mode and WOS),” the guidelines say.
To prevent the possibility of the Indian banking system being dominated by foreign banks the framework has certain measures to contain their expansion if the share of foreign banks exceeds a critical size.
The central bank will put a stop on further entry of new WOSs of foreign banks or capital infusion when the capital and reserves of all foreign banks in India exceed 20 per cent of the capital and reserves of the entire banking system.
Foreign-owned banks operating as subsidiaries will now be required to designate 40 per cent of their lending to the “priority sector,” which includes underserved parts of the Indian economy and agriculture.
Popular foreign banks in India like Citigroup, HSBC and Standard Chartered operate currently as “branches” and not subsidiaries.
The Indian Finance Ministry is keen to have more banks in the country to promote financial inclusion and infuse competition that brings in more efficiency in the financial sector.
Banking is considered to be an increasingly lucrative industry in India.
Indian banks are growing quickly with assets of $1.5 trillion last year and the country is set to increase its share of global banking revenue to three per cent by 2015, a figure that has doubled in just six years according to consultants at McKinsey.