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Chinese fund may help Branson finance bid for Northern Rock

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Chinese Investment Corporation, a $200-billion state-owned sovereign fund, is said to be in talks with Richard Branson’s Virgin Money to partly bankroll the UK financial institution’s bid to acquire Northern Rock, a British bank taken over by the government there in 2008.

If the deal between CIC and Virgin Money is agreed, it will be the first major investment from China in the British banking sector. CIC will also be joining a group of investors — they include US private equity firms Carlyle and General Atlantic Partners and the Universities Superannuation Scheme, Britain’s second-biggest pension fund — which have agreed to part-fund Virgin Money’s retail banking expansion in the UK. Virgin Money currently has interests only in the credit card and mortgage businesses in the UK. A successful bid to buy UK government-owned Northern Rock would enable it to enter the highly competitive retail banking sector in the UK.

Northern Rock came into public ownership in 2008 when it was nationalised by the UK government as part of an effort to save British banking institutions from bankruptcy after then 2007 financial crisis. Earlier this year, the UK government had announced its intention to sell the bank and is hoping to finish the process by the end of 2011.

While investors on either side of the Atlantic are showing keen interest in acquiring Northern Rock, there is very little interest from India. Sources in the Indian banking sector said the timing for global expansion by is still not right, given the bleak financial outlook across Europe.

“The agenda set for Indian banks is very clear. We have to expand our reach and provide banking services in un-banked and under-banked areas. There are many people in this country who do not have bank accounts. Our primary objective is to cater to banking needs of Indian citizens. Only then, will we look at overseas acquisitions and expansions. It does not make sense for Indian banks to acquire banks overseas, unless there is a strategic need. Only if you have mega expansion plans in a particular market will you explore inorganic opportunities to accelerate your growth. I don't think the UK is such a strategic market for any Indian bank,” said a source in the sector.

A handful of Indian banks such as State Bank of India, Bank of Baroda and ICICI Bank have a presence in the UK's retail banking sector. Indian banks in the UK have so far kept the Indian diaspora as their primary focus group customers. SBI has been opening new branches in regions with a strong Indian and South Asian population.

There are no regulatory hurdles for Indian banks to acquire those in the UK, except for clearance from the Reserve Bank of India. “RBI is more conservative than any other global regulator and only very large banks will be allowed to take this route. There is a debt crisis in Europe. As a banker, you have to understand the market, you have to be familiar with the local rules and regulations. This takes time. In this environment, particularly, no one will be willing to take a risk,” said another source

Adding: “In developing or under-developed nations, there could be an opportunity (like Punjab National Bank acquiring Kazakhstan's Dana Bank) but in markets like the UK and US it will be a difficult route. Also, how such an acquisition will help us in our earnings (is something) we have to justify to our shareholders. There is growth opportunity in India alone; then, why should we look at acquisitions overseas?”

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