FDI in banks: More foreign money into banking system, so what?

The government is considering increasing the foreign direct investment limit to 100% for private lenders and 49% for public sector banks

A market expert on a television channel jokingly said the CNX Nifty Bank index could someday become bigger than the BSE Sensex. On Thursday morning, with gains of about 500 points it seemed as though the joke could become true, thanks to reports that the government is considering increasing the foreign direct investment (FDI) limit to 100 per cent for private lenders and 49 per cent for public sector banks (PSBs).
 
While the euphoria fizzled out over the course of trade, the points to ponder are who could benefit from this move and whether higher FDI can be the magic wand for the industry.
 
As for the benefits, analysts at Morgan Stanley point out that it would imply an increase in the banking sector weight in MSCI, especially for banks with higher foreign investment headroom. HDFC Bank, now at the threshold of exhausting the current foreign limit of 74 per cent, may gain most. The HDFC Bank stock appreciating by over two per cent reflects the same, but other private bank stocks gained by only 0.9-1.8 per cent and Axis Bank ended a tad lower.
 

Even the PSB stocks, including Bank of Baroda, State Bank of India and Punjab National Bank, ended the day in red, as the news is seen as only a sentiment booster. Analysts at ICICI Securities, however, say if implemented, it indicates the government’s intention of divesting ownership, which is positive if really done. It could also provide the much-needed funds or capital to PSBs.
 
Yet all these are easier said than done, says an ex-banker, who a few years back headed a PSB. “Hiking foreign ownership to 100 per cent or 49 per cent entails many challenges starting from repatriation of profits and throws up many questions, including some that are politically sensitive,” he said.
 
A fund manager says the move may not bring the much-needed relief to the sector. “The industry (private banks and PSBs) needs money. Whether foreign money will evenly flow into banks is uncertain as we have just about peaked the stress recognition cycle,” he added. Therefore, it could get tricky to buy bank stocks based on such speculations or even on news like recapitalisation of PSBs, he warns.
 
Edelweiss, which sees higher FDI limits as positive, also said in a note that the process would be long drawn as it would involve parliamentary approvals and big structural change in the bank’s ownership.
 
Then there are more challenges even for private banks. Another fund manager cautions that the non-performing assets (NPA) ratio of some of the top banks, including HDFC Bank and IndusInd Bank, have seen some increase recently and there is also the uncertainty of how the divergence in reporting of bad loans pans out after the Reserve Bank of India audit. While there isn’t any reason to be alarmed for now, there is a dark area, especially for corporate banks. “Among the few hopes is that the NPA resolution will help corporate banks cut their losses. But, we haven’t seen a convincing case of how resolution would really play out. And valuations of the banking stocks are not reflecting these concerns,” he warns.
 
With these worries remaining, whether foreigners would be prepared to throw good money needs to be seen.