RBI considering making it easier for foreign banks to acquire stakes in Indian banks

According to some reports, Reserve Bank of India (RBI) is considering making it easier for foreign banks to own stakes in Indian banks. Currently, foreign banks or financial institutions cannot own more than 15% stake in Indian banks. Also, there is the cap that no single entity, who is a strategic investor, can hold more than 26% voting rights in an Indian bank. So, if a foreign bank acquires a stake in an Indian bank, and its voting rights post the acquisition is more than 26%, it will have to sell its stake to bring down its voting rights to less than 26%.  A strategic investor is that who may influence the operations of the bank and is not just a financial investor.

Central bank has adopted a case-by-case approval approach

The central bank has now adopted the approach of clearing applications of foreign banks & financial institutions on a case-to-case basis. Recently it allowed Japan’s Sumitomo Mitsui to acquire 20% stake in Yes Bank.

More participation of foreign banks has also become necessary for the Indian economy because of its growing capital needs. India is currently the fastest growing major economy in the world. To sustain and accelerate its growth rate, it needs more capital.

Many foreign banks want to avail of the opportunities that fast-growing Indian economy can offer them. Due to tighter regulations in the aftermath of the 2008 financial crisis, Return on Capital Employed (ROCE) of many western banks has been consistently under pressure. The high interest rate Indian economy may also offer more income opportunities for these banks.

Fairfax , Emirates NBD may be interested in acquiring stakes in IDBI bank

According to a report published in Reuters, Canada’s Fairfax and Emirates NBD are interested in acquiring significant stakes in IDBI bank. Emirates NBD also got the approval of RBI recently for setting up its Indian subsidiary.

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Source: RBI, Sources