Baby steps to India bank reforms

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SummaryThe biggest risk in India for banks is the political risk.

India's plan to increase voting rights for shareholders in banks would improve management and corporate governance and draw more investment, but it falls short of lifting ownership restrictions or relinquishing the government's stranglehold on most lenders.

New Delhi's reluctance to shed some of its 50-plus percent stakes in state banks, which have a market share of 70 percent and a bigger proportion of the sector's bad loans, means a big chunk of lending remains exposed to political interference.

The biggest risk in India for banks is the political risk, said Juergen Maiar, an Austria-based fund manager with Raiffeisen Euroasien Aktien that owns Indian shares worth $300 million, including in public and private sector banks.

Still, in what is seen as a positive step towards reform, India's parliament is expected soon to approve amendments to banking laws that include raising the limit on shareholders' voting rights in public and private sector banks.

However, the current parliamentary session, which ends on Sept. 7, has been paralysed by a furore over a state auditor investigation into coal block allocations, casting doubt over the timing of a vote on the bill.

If approved, the cap on voting rights for investors in private sector banks such as HDFC Bank and ICICI Bank would rise to 26 percent from 10 percent, and to 10 percent for government banks such as State Bank of India from just 1 percent now.

Higher voting rights will be good for investors. It will help banks raise capital from investors. But in public sector banks where the government shareholding is high it may not make much difference, said R.K. Bansal, executive director at state-run IDBI Bank.

The voting rights proposal was a key cause of last week's two-day strike by roughly o ne million bank workers, mostly from state banks, who oppose the government ceding any control.

The government is trying to increase the influence of MNCs (multinational corporations) over banks, both private and public sector, said Vishwas Utagi, secretary of the All India Bank Employees Association. It's a threat for the banking sector and the country.

India has struggled for years to reform and liberalise key sectors such as banking, retail and insurance due to political opposition, including from within the ruling Congress party.

Left unchanged is the limit that caps any single investor from owning a minority stake of more than 5 percent in an Indian bank, or 10 percent with central bank approval. The limit has

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