Indian banking sector sees wave of foreign investments, say experts

Experts attribute the trend to country's growth potential, regulatory stance

India’s robust long-term growth outlook, along with the increasingly accommodative approach to foreign investment in banking on the part of the Reserve Bank of India (RBI) and the government, is fuelling a wave of deal making aimed at creating larger and stronger banks, according to industry experts.

 

This year, Japan’s Sumitomo Mitsui Banking Corporation (SMBC) bought a 24.22 per cent stake in Yes Bank. State Bank of India (SBI), along with seven private banks that had invested in Yes Bank during its reconstruction phase in March 2020, collectively sold their 20 per cent to SMBC for Rs13,482 crore.

 

SMBC picked up another 4.22 per cent in the bank from private equity investors. This marked the single-largest cross-border investment in an Indian private bank. Experts say the transaction could set a precedent for similar deals by foreign financial institutions, which have long been constrained by regulatory caps on ownership and voting rights.

 

The RBI caps foreign investors’ vote in private banks at 26 per cent and limits financial institutions’ direct investment to 15 per cent.

 

Reports suggest Emirates NBD Bank PJSC, the second-largest bank in the United Arab Emirates (UAE), is eyeing a controlling stake in RBL Bank. The proposed investment is likely to be structured through a preferential allotment of equity shares and warrants, followed by an open offer for an additional 26 per cent.  RBL Bank, in a notification to the stock exchanges, said such reports were incorrect.

 

“The bank is on a growth trajectory and routinely explores opportunities aimed at enhancing shareholder value. However, such discussions do not warrant a disclosure under Regulation 30 of the Listing Regulations, at this stage,” the bank said responding to an exchange query on a newspaper article that reported NBD eyed a controlling stake in the bank.

 

“Further, the contents of the aforesaid article are incorrect,” it said. Emirates NBD had shown an interest in acquiring IDBI Bank, in which the central government and the Life Insurance Corporation of India (LIC) together plan to sell 60.7 per cent. The government holds 45.48 per cent and LIC 49.24 per cent.

 

Prem Watsa-owned Fairfax Holdings had bought 51 per cent in Kerala-based Catholic Syrian Bank  at about Rs12,000 crore. It then trimmed it to about 40 per cent. Fairfax Holdings is eyeing the government’s stake in IDBI Bank, media reports suggested.

 

“The regulatory environment has been accommodative in letting foreign entities have majority stakes in Indian banks... The Yes Bank transaction is in that direction. I think the government is keen on having more foreign banks here. Foreign entities, particularly in countries with which India has good relations, like the UAE and Japan, are interested in Indian banks. The regulator is comfortable with foreign entities taking a bigger stake in Indian banks,” said a banking industry insider.

 

If NBD, which has received the regulatory nod for operating through the wholly-owned subsidiary route in May, buys a stake in RBL, it will augment the capital base of the private lender. “Foreign banks will invest in India only when they are confident of long-term gains. India’s consistent growth prospects make it an attractive market for businesses looking to expand beyond their home jurisdictions. In the past, foreign direct investment (FDI) in banks was restricted, but there has been a shift in policy. Today well-diversified banks can take larger stakes, with regulatory approvals allowing significant investment,” said another industry insider.

 

Banking remains one of the most closely regulated sectors of the Indian economy. Under current rules, FDI in private banks is capped at 74 per cent.

 

No single financial entity, foreign or domestic, is allowed to hold more than 15 per cent without approval.