Reserve Bank of India allows foreign banks to invest up to 10% in local private lenders

The Reserve Bank India (RBI) has allowed foreign banks to invest up to 10% in local private lenders and supranational institutions such as Life Insurance Corporation of India to take this to as much as 40% as part of a sweeping set of measures expected to help them shore up capital and possibly encourage consolidation in the sector.

The new steps announced by the central bank on Thursday could even cover rescues led by overseas banks, marking a radical new direction in policy. The central bank also doubled the stake that individuals and institutions can acquire in private banks to 10%. Non-regulated, non-diversified and unlisted financial entities can acquire stakes of up to 15%.




Critically, the 10% that foreign banks are allowed to acquire can be increased in exceptional circumstances, such as restructuring of weak lenders or in the interests of consolidation in the banking sector, RBI said.

“Through this RBI move, it seems the much-expected consolidation will come through in the banking sector,” said Kalpesh Mehta, partner, Deloitte Haskins & Sells. “It is also aimed at strengthening the capital base through institutionalisation and high net worth individual holdings.” RBI has stipulated separate limits for non-financial and financial institutions. Among the latter, it has done so for diversified and non-diversified ones.

Non-financial institutions can take up to a 10% stake, while non-financial companies (such as those engaged in manufacturing) can take up to a 15% stake. However, any acquisition of shares above 5% in a bank will continue to require RBI approval.

Total foreign shareholding in these banks including foreign direct investment ( FDI), foreign institutional investment (FII) and non-resident Indian (NRI) investment together cannot be more than 74%, RBI said. However, the new norms do not apply to existing private sector banks where specific orders have been passed to dilute shareholding or where promoters or groups have been allowed to hold shares in excess of 10%. Also, deadlines given to promoters or promoter groups to reduce their holdings to 10% from more than 15% will remain in force, RBI said.(News Courtesy: economictimes)

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