Indian Banking Sector:Not yet free playing field for multinational banks

Date:   Saturday , April 30, 2005

The Indian banking sector seemed a hunting ground for foreign banks, during 2003-04 when non-resident equity in private banks could be raised to 74 percent.

Though they entered with hope of buying out small private banks in India for expanding, they still cannot dream of dominating the scene, as the Reserve Bank of India (RBI) doesnít give them liberties in choosing their prey.

Indian banks still dominate the banking sector, where retail loans are worth $46 billion. Twenty-seven Indian Public Sector banks control more than three-quarters of all bank assets and liabilities, private sector banks have around 18 percent and foreign banks have about 7 percent. The RBI guidelines keep no ceiling on investments for Indian private banks like ICICI and HDFC, which now have a portfolio investment of 71 percent and 49 percent, respectively.

This has clearly limited operations of foreign banks hoping to spread their wings through the acquisition of small private banks. HSBC, Citibank and ABN Amro have already set up wholly owned subsidiaries in India and the only expansion route is by acquisition. HSBC for example, which bought a stake of 14.6 percent stake in UTI bank last year may now have to cut its holding to below 5 percent, the maximum cross-shareholding that the new rules allow. Its stake is already due to fall to 12.5 percent after UTIís issue of Global Depository Receipts.

With the regulator having the last word in selection of weak banks, it is not even clear that foreigners may buy one of the dozen or so weak private banks. Organic growth is still an option. HSBC India reported in March that it planned to invest $180 million in expanding its operations.

Thus, the future is still bright as foreign banks can set up retail-finance subsidiaries, whose expansion is less restricted than that of banking subsidiaries.