Overseas banks may be told to sell at least 26% stake in local units

Updated: Mar 31 2009, 05:49am hrs
Overseas banks in India may have to sell at least a 26% stake in their local subsidiaries and meet government targets for lending, under proposals made by a joint central bank and finance ministry panel.

Foreign banks should list their subsidiaries on Indian stock exchanges, capping their ownership at 74%, a committee that included central bank deputy governor Rakesh Mohan and economic affairs secretary Ashok Chawla said in a report released in Mumbai on Monday. Overseas lenders should meet targets for lending to farmers in line with local banks, it said.

The Reserve Bank of India is due to review rules for overseas banks operating in the South Asian nation from next month. India, which limits the number of branches that overseas banks including Citigroup Inc can operate and restricts investments abroad by Indian lenders, has mostly avoided the $1.26 trillion in writedowns and losses by global financial firms as the world economy entered a recession.

Overseas banks in India should face the same requirements as local lenders in terms of credit flow to the agriculture sector and small- and medium-sized companies, according to proposals in the report. The committee assessed the strength of the banking system, dominated by government-controlled lenders, amid the global financial market crisis.

The committees recommendations arent binding. India is scheduled to hold nationwide elections in April and May.

Citigroup, HSBC Holdings Plc and Standard Chartered Plc have added branches in India to tap an economy that has grown an average of more than 8% since 2003. Indias central bank said in February 2005 that it would review rules for lenders to spur competition in the worlds fastest-growing major economy after China.

Indias central bank has been fairly liberal, typically giving more than the 12 branch licences its required to provide each year under its World Trade Organisation commitments, the panel said.

The global credit crisis has helped Indias state-run banks , which account for more than half of the nations banking assets, gain market share as depositors shunned private and overseas banks. Indias central bank limits the ability of local lenders to extend credit to high-risk sectors such as real estate, trading in exotic derivatives and expanding overseas.

Local private-sector banks own 16 percent of the nations banking assets, according to central bank data. Foreign banks account for 5.9%.

Global banks, which are currently allowed to set up branches or operate wholly owned subsidiaries in the nation, can be permitted to acquire stakes in local non-state lenders that need restructuring, the panel said today. Indias policy on foreign banks should be based on reciprocity, the panel said in its recommendations.