Saturday, April 4, 2009

India proposes rule to force global banks to sell 26% stake

By Govardhana Rangan [Bloomberg]

Overseas banks may have to sell a stake of at least 26 percent in their Indian subsidiaries and meet government targets for lending, under proposals from a central bank and finance ministry panel.

Foreign banks should list their subsidiaries on Indian stock exchanges, capping their ownership at 74 percent, the joint committee says in a report released yesterday. Overseas lenders should meet targets for lending to farmers in line with local banks. 

The committee that made the proposals included central bank deputy governor Rakesh Mohan and Economic Affairs Secretary Ashok Chawla.

The Reserve Bank of India is due to review rules for overseas banks operating in the country from next month. 

India, which limits the number of branches that overseas banks can operate and restricts investments abroad by Indian lenders, has mostly avoided the $1.26 trillion (R12.1 trillion) in write-downs and losses by global financial firms sparked by the US subprime meltdown.

Overseas banks in India should face the same requirements as local lenders in terms of credit flow to the agriculture sector and small and medium-sized companies, the report proposes. The committee assessed the strength of the Indian banking system, which is dominated by government-controlled lenders, amid the global financial market crisis.

The committee's recommendations are not binding. India is scheduled to hold nationwide elections in April and May.

Citigroup, HSBC Holdings and Standard Chartered have added branches in India to tap an economy that has grown an average of more than 8 percent a year since 2003. India's central bank said in February 2005 that it would review rules for lenders to spur competition in the fastest-growing major economy after China.

India's central bank had been "fairly liberal", typically giving more than the 12 branch licences it was required to provide each year under its World Trade Organisation commitments, the panel said.

The global credit crisis has helped India's state-run banks, which account for more than half of the nation's banking assets, to gain market share as depositors shunned private and overseas banks. India's central bank limits the ability of local lenders to extend credit to high-risk sectors such as real estate, trading in exotic derivatives and expanding overseas.

Local private sector banks own 16 percent of the nation's banking assets, according to central bank data. Foreign banks account for 5.9 percent.

Global banks, which are allowed to set up branches or operate wholly owned subsidiaries in the nation, could be permitted to acquire stakes in non-state lenders that needed restructuring, the panel said.

India's policy on foreign banks should be based on "reciprocity", the panel recommended.