Raghuram Rajan effect fuels Karnataka Bank, Lakshmi Vilas Bank, Dhanalaxmi Bank shares

fe Bureau Posted online: Tuesday, Oct 15, 2013 at 0000 hrs
Mumbai : Small and mid-sized private bank shares like Karnataka Bank Ltd, Lakshmi Vilas Bank Ltd and Dhanalaxmi Bank were up 15-20% from the previous close, after Reserve Bank of India (RBI) governor Raghuram Rajan suggested the policy framework for foreign banks would be liberalised in a manner that would allow them to take over smaller Indian banks.

"That is going to be a big opening because one could even contemplate taking over Indian banks, small Indian banks and so on,” Rajan said at a gathering in Washington on Saturday, adding the final guidelines on the policy framework for foreign banks operating in India would be out in the next few weeks.

Banks like Karnataka Bank, Lakshmi Vilas Bank and Dhanalaxmi Bank led the rally on Monday in response to Rajan's comments as markets speculated on possible takeover candidates.

South India-based banks such as Karnataka Bank and Lakshmi Vilas Bank that have a strong franchise in the Southern markets have always been seen as possible acquisition candidates. The two banks reported total advances worth R25,244 crore and Rs 11,849 crore respectively, as on June 30. Karnataka Bank's market cap as on Monday stood at Rs 2,051.57 crore, while that of Lakshmi Vilas Bank was at Rs 759.43 crore.

In his comments, Rajan said foreign banks which choose to operate in India through the wholly-owned subsidiary model will receive "near national treatment" however, with riders.

“Your country should allow the same to our own banks and secondly, you come through one route either you have a branch or you have a subsidiary; don't do both,” he said.

The comments come in light of the discussion paper on foreign banks in India which RBI first issued in January 2011. The policy framework, however, has still not been finalised despite multiple rounds of deliberations. Among other things, the paper mooted the idea of allowing foreign banks to operate through a wholly-owned subsidiary model in India, which would give them treatment similar to domestic banks.

Meanwhile, foreign banks have been circumspect on the option of subsidiarisation as it would restrict their ability to repatriate capital from the Indian operations if required. The tax treatment suggested by the paper has also not found favour with the foreign banks.

“We have been waiting since 2011, when the first discussion paper came out. Since then, there has been a lot of talk, though no new development has happened. We would rather wait and watch,” said the Indian spokesperson for a foreign bank. When contacted, HSBC India and Citibank said they would be unable to comment on the developments, till final guidelines were announced.

“Foreign banks want to know what is the distinct advantage of taking the subsidiary model. If it means that the branch licensing policy is liberalised, they would be interested," said Abizer Diwanji, head of financial services at Ernst & Young.

The paper had also argued that priority sector requirements for subsidiaries of foreign banks would be similar to those of Indian banks. Currently, foreign banks need to maintain 32% of their advances under the priority sector lending category, however, in the subsidiary model, this would go up to 40% as is the case with domestic banks.

Most foreign banks are in favour of a policy which allows them to choose between the subsidiary model or branch model to expand their presence in India, rather than being rushed into one model by the regulator, experts said.