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Banking Theory and Practice

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Caselet India Steps up Bank Liberalization

ndia’s parliament has passed a bill to liberalise banking regulations, potentially
increasing foreign investment while also permitting some of the country’s most
Icelebrated business names to apply for new bank licenses.
Parliament’s lower house passed the much-awaited legislation on Tuesday evening, in a
further boost to the reforming efforts of Prime Minister Manmohan Singh’s Government.

Many of India’s most prominent companies, including the Tata group and billionaire Anil
Ambani’s Reliance conglomerate, have long-harboured plans to transform their financial
services arms into fully fledged banks.
The legislation gives the Reserve Bank of India, the central bank, powers to issue new
licenses, while also increasing foreign investment limits in Indian banks to 26 per cent
from the present 10 per cent.
India’s major business houses have effectively been barred from the sector since the
Government of Prime Minister Indira Gandhi nationalised all privately owned banks in
the late 1960s.
However, banking analysts suggest the RBI remains concerned about the potential risks
of providing licenses to the various interested conglomerates, which are also thought to
include the Aditya Birla group and Mahindra & Mahindra.

India’s banking system has come under increasing strain this year, with a sharp rise in
both non-performing assets and debt restructuring, especially from heavily indebted
industrial groups, against a backdrop of the country’s slowing economy.
“The road map for the likes of Tata and Birla will be long and arduous, given that RBI is
likely to set out stringent qualification criteria,” says Ravi Trivedy, an independent analyst
and former head of banking at KPMG India.
But India’s leading companies remain attracted by the prospect of further fast growth in
the country’s banking sector, which is set to become the world’s third largest by 2025 as
measured by assets, behind only China and the US, according to Boston Consulting Group.
“Despite the RBI’s worries, I think they will get upwards of 20 applications, most of them
from big Indian corporates who already have financial arms, although it may be a couple
of years before the regulator makes a decision either way,” said Mr Trivedy.

The Banking Laws (Amendment) Bill must now be debated in India’s upper house of
parliament, although most analysts think it has sufficient support to pass into law.
The new legislation also allows foreign institutions to hold higher stakes in Indian banks,
potentially allowing others to follow the likes of Rabobank, of the Netherlands, which
invested in Yes Bank, a fast-growing private bank, before unveiling plans to set up in
India on its own.
“This change isn’t going to make much immediate difference, because we don’t yet know
if RBI will change its own rules to reflect these higher foreign limits,” says Shinjini Kumar,
head of financial services regulation at PwC in Mumbai.

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