Govt plans to hike foreign investment cap in PSBs to 49%, says report

India is planning to allow direct foreign investment in state-run banks of up to 49%, more than double current limits, according to a person directly involved in the policy discussions.

The finance ministry has been discussing the matter with the Reserve Bank of India (RBI), the country's banking sector regulator, over the past couple of months, said the person, adding that the proposal has yet to be finalised.

Foreign interest in India's banking industry is on the rise as evidenced by Dubai-based Emirates NBD's recent $3 billion purchase of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp's $1.6 billion acquisition of a 20% stake in Yes Bank which the Japanese lender later raised by another 4.99%.

State-run banks are also seeing interest from overseas investors and raising the foreign ownership limit will help them gain more capital in the coming years, the person said.

The Nifty PSU Bank index rose as much as 3.02% to a record high of 8053.4 after the Reuters report, and closed the session 2.22% higher.

NARROWING THE GAP

A second source confirmed a hike from the current cap of 20% is under discussion, adding that the move is also part of an attempt to narrow the gap between regulations for government-owned and private banks. India allows foreign ownership of up to 74% for private lenders.

The proposal to increase the cap for state-run banks to 49% has not been previously reported.

Both sources declined to be identified as discussions are not public. India's finance ministry and the RBI did not immediately respond to Reuters' emails seeking comments.

India's robust economic growth - averaging 8% over the past three fiscal years - has led to rising demand for credit, increasing the attractiveness of the country's lenders. Deals in India's financial sector jumped 127% to $8 billion between January and September.

TWELVE BANKS

India has 12 government-owned banks, with combined assets of 171 trillion rupees ($1.95 trillion) as of March that account for 55% of the banking sector.

The government plans to retain a minimum shareholding of 51% in state-run banks, according to the first source. At present, the government has much higher ownership in all 12 banks.

Current foreign ownership in state-run banks ranges from a high of about 12% in Canara Bank to near zero in UCO Bank as of September 30, according to data from stock exchanges.

In general, state-run banks are viewed as weaker than their private peers. Often tasked with providing credit to less affluent sections of society and opening branches in the hinterlands, the banks have been more prone to bad loans and have had weaker returns on equity.

KEEPING SAFEGUARDS

The RBI has taken a number of steps in the past few months to reduce and ease regulations in the banking sector, while becoming more open to allowing foreign banks to own larger stakes in Indian private lenders.

But certain safeguards will stay to avoid arbitrary control and decision-making, the first source said, adding that a cap on voting rights of 10% for a single shareholder will remain in place.

($1 = 87.8950 Indian rupees)

(Reporting by Nikunj Ohri in New Delhi; Additional reporting by Gopika Gopakumar in Mumbai; Editing by Edwina Gibbs)