Over the past several months, there has been hectic debate about the changes in the Indian banking sector. Whether it is mergers and acquisitions, consolidation or even the newly energised state run banks, the sector is looking ready for action. Amidst all this is the issue of foreign direct investment (FDI) in the sector and expectations relating to what the foreign banking majors would now do, with the relaxation of FDI norms.
The latest position on FDI in banking is that 74 per cent foreign holding is allowed, and voting rights are set to be proportional to holdings. This, most expect, would open the floodgates for foreign capital into Indian banking. After all, much of the financial sector reforms have been implemented in India, and our banking regulations currently compare with the best in the world. Add to that the growing stature of the Reserve Bank of India and you have a heady cocktail. But a closer look at the ground reality puts forth a different picture.
The India head of a leading foreign bank, which is hugely bullish on our banking sector, explained to me the other day why foreign players may not be willing to rush in with their moneybags just yet. It is true that the market capitalisation of a number of small-to-medium sized private banks is well within reach of these international banking majors, and a bank may even be picked up for what would be small change for foreign banks of that size. But for the major foreign players, some of whom are already doing business for years in India, it hardly makes sense to put in money right now in acquiring banks, for a variety of reasons.
If one goes by the quality of banks ?on offer?, banks which are at affordable market capitalisations and seen to be easy takeover targets, it is clear that most are not the ones which the foreign majors may want to pick up. Foreign bankers say that despite the thrust most of them have on retail banking, acquiring affordable private banks may bring more problems than solutions. While some may be duplicating part of their wholesale banking act, others may come with a retail client base which may be more towards the lower end of the spectrum, types which many of the foreign banks may actually be willing to let go.
This is because even in retail banking, some of the key foreign banks have ?mass affluent? clients at their lower end, in a chain which goes up to higher net worth and then the creme-de-la-creme clients. Hence, the smaller retail clients may not be attractive propositions for the foreign banks, who may want to get them out. That, to start with, would send the wrong signals.
?Apart from the lack of fit, some banks may need nursing back to good health,? the foreign bank boss told me. This means, after the buyout, it may take two or three years just to set the acquired bank right, something which the acquirer may hardly be willing to spend time on in this age of dog-eat-dog competition. It makes more sense in such cases, foreign bankers say, to grow organically, rather than focus on acquiring banks. Besides, with most of the big foreign players already having acquired a desi look, going aggro in the Indian market isn?t too tough a task.
But the intriguing aspect in all this is, despite the announcement of local incorporation norms for foreign players as far back as the Budget before the last one, there?s still no word on how local incorporation is to happen. Consequently, foreign banks who may not be too keen on going the FDI way and are, in fact, keen to look at the local incorporation route carefully, are confused about the silence on that front. In 2002, the government had allowed foreign banks to set up Indian entities through the local incorporation route, and separate regulations were expected on that front. For some major foreign banks who know the Indian market well, that route at the moment clearly looks more attractive, even as the state-run players get more active. With the FDI route relatively unattractive for the foreign players, it?s time for some clarity from the government on where the local incorporation policy stands at the moment.