Allowing bank mergers would boost local consolidation-ET
NEW DELHI: The finance ministry and the Reserve Bank of India (RBI) are working on new guidelines that will ease mergers and acquisitions (M&As) among banks, which would pave the way for the creation of stronger entities through consolidation and for foreign banks to strengthen their local presence.
"We are in discussions with the RBI. The idea is to make the norms easier and remove the irritants, which lead to delay in such transactions after regulatory approvals have been obtained," a finance ministry official said.
RBI governor Raghuram Rajan had, last month in Washington, said that the banking regulator was planning a significant change in the rules to allow foreign banks to have a much bigger presence in India than they currently have and that they may even be allowed to acquire domestic lenders.
Mergers and acquisitions in the banking space have been few because of strict rules governing them. The last such exercise was the troubled Bank of Rajasthan's absorption by ICICI in 2010 in a union that was brought about by the RBI.
Among state-owned entities, the last one was State Bank of India absorbing subsidiary State Bank of Indore, also in 2010. "The new norms will also be applicable to all banks including state-run banks but within the existing framework," the official said.
The government has often voiced the need for consolidation to create stronger and bigger banks but has maintained that it will not force state-run lenders into any mergers. Any such move would have to be initiated by the banks themselves and the government will act as a facilitator, the finance ministry has maintained.
India has 26 state-run banks, 1,545 urban cooperative banks and 64 regional rural banks. It has 24 private sector banks, a number that's expected to rise once new licences are issued. RBI is currently evaluating applications.
The ministry has already asked the Competition Commission of India (CCI) to exempt banking mergers and acquisitions from its purview. The ministry of corporate affairs (MCA), however, is not inclined to provide such exemption, an official said.
"We have sent our comments to the finance ministry," the corporate affairs ministry official said, adding that CCI's role is to ensure that mergers, compulsory or otherwise, do not have an adverse effect on competition. CCI comes under the administrative control of the corporate affairs ministry.
In February, the government exempted mergers and acquisitions plans for loss-making and failing banks from the purview of CCI for a period of five years.
RBI opens doors to M&As for foreign banks in India-ET -07.11.2013
MUMBAI: Reserve Bank of India GovernorRaghuram Rajan threw open the doors for mergers and acquisitions in the banking space as he delivered on the promised level-playing field for foreign banks such asCitigroup and HSBC.
The central bank promised carrots if they convert into a local subsidiary, but stopped short of mandating big banks to locally incorporate, or list on local bourses.
Governor Rajan has provided an option to convert or operate through branches for those present before 2010, but has provided incentives to convert with a prescribed capital of Rs 500 crore.
"Wholly-owned subsidiaries may be permitted, subject to regulatory approvals and such conditions as may be prescribed, to enter into M&A transactions with any private sector bank in India, subject to the overall foreign investment limit of 74%," said the proposed framework.
The principles of reciprocity and single mode of presence will determine the need for a foreign bank to locally incorporate, but many of the parameters are not provided in black and white.
"Conversion is also desirable from the financial stability perspective," said RBI. "It ensures that there is a clear delineation between assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring-fenced capital and assets within the host country.''
The proposed guidelines also attempt to prevent foreign banks from getting bigger in India.
"To prevent domination by foreign banks, restrictions would be placed on further entry of new WOSs of foreign banks, capital infusion, when the capital and reserves of the WOSs and foreign bank branches in India exceed 20% of the capital and reserves of the banking system," the guidelines say. The rules also say the CEO must be a resident of India, and that the 40% lending for small and medium-sized companies and the farm sector must be fulfilled.
"It is not a game changer but it brings in new competitive element in the banking sector. It is good not only for foreign banks but also for Indian bank looking at overseas expansion since it is based on element of reciprocity," Robin Roy, associate director-financial service PwC India.
The central bank promised carrots if they convert into a local subsidiary, but stopped short of mandating big banks to locally incorporate, or list on local bourses.
Governor Rajan has provided an option to convert or operate through branches for those present before 2010, but has provided incentives to convert with a prescribed capital of Rs 500 crore.
"Wholly-owned subsidiaries may be permitted, subject to regulatory approvals and such conditions as may be prescribed, to enter into M&A transactions with any private sector bank in India, subject to the overall foreign investment limit of 74%," said the proposed framework.
The principles of reciprocity and single mode of presence will determine the need for a foreign bank to locally incorporate, but many of the parameters are not provided in black and white.
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"Banks with complex structures, banks which do not provide adequate disclosure in their home jurisdiction, ones which are not widely held, banks from jurisdictions having legislation giving a preferential claim to depositors of home country in winding-up proceedings, etc., would be mandated entry into India only in the WOS (wholly-owned subsidiary) mode," the central bank said in its framework for subsidiarisation of foreign banks operating in India. This will be the third attempt in the last decade by RBI to ring fence operations of systemically important foreign banks. International banks which operate as branches have been averse to incorporate since that would reduce the leeway that they get in using the funds which are quite fungible. In fact, during the 2008 credit crisis, a US bank CEO requested his Indian operations head to transfer funds to the US to help tide over the crisis.
"Conversion is also desirable from the financial stability perspective," said RBI. "It ensures that there is a clear delineation between assets and liabilities of the domestic bank and those of its foreign parent and clearly provides for ring-fenced capital and assets within the host country.''
The proposed guidelines also attempt to prevent foreign banks from getting bigger in India.
"To prevent domination by foreign banks, restrictions would be placed on further entry of new WOSs of foreign banks, capital infusion, when the capital and reserves of the WOSs and foreign bank branches in India exceed 20% of the capital and reserves of the banking system," the guidelines say. The rules also say the CEO must be a resident of India, and that the 40% lending for small and medium-sized companies and the farm sector must be fulfilled.
"It is not a game changer but it brings in new competitive element in the banking sector. It is good not only for foreign banks but also for Indian bank looking at overseas expansion since it is based on element of reciprocity," Robin Roy, associate director-financial service PwC India.
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