Reportedly, Indian policymakers are currently in discussions to formulate ways to revamp and open up the banking sector by easing procedures for corporate and foreign bank participation in acquiring public sector banks which the central government is deciding to privatise.
As of now, industrial houses that generate 60 percent of their turn over from non-financial entities are not allowed to apply for bank licences and even their equity participation is limited to 10 percent since regulators are afraid that this could risk the financial stability due to the propensity of the corporates to skim banks for ‘self-loans.’
According to ET Now, currently, there’s a rethinking going on over the existing policy between policymakers and that the discussions are at an “early stage”. The government and the central bank may move with “abundant caution” and will consider global as well as prior experience.
Greater regulatory vigilance in terms of preferring corporate players with a long term 10-year business plan, “Fit & Proper Criteria” for corporate participation for taking equity in banks, tighter norms for related party transactions could be required to ensure no excessive concentration or risks to financial stability.
“We need to open up the banking system but the move will be designed with ‘abundant caution’ and will need stonewalling from misuse. Opening up banking sector will come with greater regulatory vigilance on banks, fin institutions,” officials confirmed.
Policymakers are also on discussions to allow foreign banks with Indian subsidiaries to participate in buying government stakes when state-owned banks like Central Bank of India, Bank of India, Punjab and Sind Bank, IOB and UCO Bank get privatised.
The banking sector has been faced with rising bad loans leading to declining capital adequacy ratios and even failures in some cases. Recently, Yes Bank was saved, all thanks to the government and RBI intervention when SBI lead consortium infused more capital into the private lender to save it from bankruptcy. Last week the government and RBI had to intervene to rescue the Lakshmi Vilas Bank by proposing a merger with the Indian subsidiary of DBS Bank, though LVB’s investors are opposing the merger.
Besides DBS, only SBM Bank is a foreign bank that has Indian subsidiaries. SBM Bank (India) Limited (Subsidiary of SBM Group) and DBS Bank India Limited have been issued a licence on December 6, 2017, and October 4, 2018, respectively for carrying on banking business in India through a wholly-owned subsidiary.
The widening of this move to allow foreign banks to buy public sector banks when the government decides to privatise them will not only lead to an increase in competition in the sector leading to higher efficiency but will also make a paradigm shift in the sector.
The discussion on the matter is still at an early stage but the policy could be released along with the government’s larger privatisation policy that will allow the selling of some Indian public sector banks. Bank of India, Central Bank of India, Bank of Maharashtra, Punjab & Sind Bank are some of the state-run lenders that the government is looking to privatise.