The central bank is easing its stance on foreign banks

RBL Bank on Saturday said Emirates NBD will acquire up to 50% of the shares. ₹26,853 crore. It will require approval from the Reserve Bank of India (RBI), among others.

Mint It was reported on October 13 that the duo were in talks with Emirates NBD Bank, which plans to acquire a controlling stake in RBL Bank, citing two people with direct knowledge of the discussions.

The deal comes just weeks after Sumitomo Mitsui Banking Corp acquired a 24.2% stake in Yes Bank in two transactions. Mint had reported in August that the Yes Bank-SMBC deal could pave the way for similar cross-border investments in the banking sector.

India’s foreign direct investment regulations allow foreign investors to buy up to 74% of banks, while RBI regulations limit a single foreign investor’s ownership to 15%. The regulator has relaxed these norms in certain cases, but voting rights are limited to 26%.

A senior consultant who also advises financial companies on such transactions said there has been a change in the central bank’s stance, with the regulator now open to the idea of ​​more foreign capital in banking.

“The regulator understands that local banks need capital to strengthen their balance sheets and allowing foreign capital will help,” said the adviser, who asked to remain anonymous. “The target of future acquisitions could be India’s mid-sized private sector banks.”

The advisor added that the RBI wants strategic investors who will stay invested for at least a decade or two, not those looking for a quick exit.

Ease of editing

Recent comments by RBI governor Sanjay Malhotra indicate that the central bank is more keen on such share sales than its earlier stated position. Malhotra told CNBC TV18 in July that the central bank is yet to receive any case in which a foreign bank wants to own 26% of Indian banks.

He told the channel: “As per the foreign direct investment policy, foreign banks are allowed up to 74% stake. Foreign banks can certainly have 26% stake in an Indian bank.”

Banking industry experts also see this deal as a revival of foreign banks in India, in a way, given that it comes at a time when foreign lenders are quitting their business in India.

“This signals the second coming of foreign banks in India, which was once grappling with restrictions on branch expansion,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP, which provides business and transaction advisory to financial sector companies.

Parekh said that beyond capital, foreign banks will bring sound risk management practices and new technologies. According to him, earlier all foreign capital was considered a no-no from the RBI’s perspective but the central bank is slowly warming up to the idea.

“Now, gradually, the banking sector itself has matured quite a bit and in this environment, the RBI feels more confident in approving such share sales, selectively,” he said.

Approvals on a case-by-case basis

There have been very few cases of foreign banks acquiring Indian lenders. However, in September, Sumitomo acquired a 20% stake in Yes Bank and signed an agreement with CA Basque Investments, a subsidiary of The Carlyle Group Inc., to acquire an additional 4.2% stake.

The central bank seized Yes Bank in March 2020 after its financial condition deteriorated and oversaw its acquisition by a group of banks led by the State Bank of India.

Earlier in November 2020, the RBI had taken over the struggling Lakshmi Vilas Bank and forced it to merge with the local unit of Singapore’s largest lender DBS Bank. This is the first time the central bank has tied up with a bank with a foreign parent to support an Indian lender.

Still, some believe that India’s banking regulatory position remains unchanged in spirit and intent.

“RBI has always been open to foreign investment as long as it remains within the prescribed regulatory limit. What RBI is more concerned about is the source and country of origin of such capital,” said Vivek Iyer, partner and financial services risk consultancy leader at Grant Thornton Bharat.

Iyer said the regulator knew these institutions would bring in money to support target banks’ capital ratios and strengthen their balance sheets.

more competition

Iyer said that since the RBI is also open to small finance banks becoming universal banks, there will be more competition in the market for existing banks that need growth capital to steer themselves in a competitive market.

In August, AU Small Finance Bank won the central bank’s ‘in principle’ approval to transition to a universal bank, becoming the first lender to receive a full-fledged banking license in 10 years.

“However, limiting voting rights to 26% means that you can bring in capital but decision-making will be limited, which is the result of a policy that keeps national interests at the centre,” Iyer said. he added.

The announcement of the RBL-Emirates NBD Bank deal comes just five months after the RBI gave in-principle approval to the Dubai bank to set up a wholly owned subsidiary in India.

India allows foreign banks to operate as branches or wholly owned subsidiaries of the parent company. All but two (DBS Bank India and SBM Bank India) operate as branches. The local unit gives the bank more flexibility than the branch. The central bank prefers foreign banks operating subsidiaries rather than branches in India.