Foreign banks not keen on buying ailing entities

Buying a sick bank is not on our radar. We'd rather go for healthy banks," said Romesh Sobti, executive vice president and country representative, ABN Amro Bank NV (India).

Sobti has, however, not ruled out the option of acquiring up to 74 per cent in an Indian private sector bank in toto.

"We need to see whether the banks identified are sick ones or simply inadequately capitalised."

On Monday evening the Reserve Bank of India came out with the package for foreign ownership in private sector banks. The package has however, been re-christened by some foreign bankers as a 'rescue package' for sick banks.

"The rules of the game have changed. It is not so much as enabling greater foreign participation in the country as rescuing the weak private sector banks," said senior bank officials.

Bankers said they would not be interested in touching mismanaged banks like the erstwhile Global Trust Bank, but were not adverse to exploring the opportunities old private sector banks offer.

"We were expecting a more speedy move towards 74 per cent ownership, but we will need to wait and see what names of banks emerge," said Sanjay Nayar, CEO Citigroup.

Bank Muscat is the only foreign bank to have acquired an ailing bank in India -- Centurion, in this case.

Many foreign banks had in the past shown interest to grow inorganically. The only issue then was the 10 per cent ceiling on voting rights. The central bank announced that this anomaly will be removed so that the shareholding structure would be reflected in terms of voting rights.

Now foreign banks have hit a new block. Most are not ready to pick up sick banks. "It does not fit into our plans today. It might also mean our having to bring in more capital if it means acquiring a bank, and then having to capitalise it as well," said senior executives at a European bank.

The new guidelines for foreign banks have given RBI a lot of leeway in deciding which private sector bank can be 'sold out' to foreign enterprise.

At the same time, it has also found a means of ensuring that the public banking sector need not again have to bail out private banks as in the recent case of GTB having to be merged into Oriental Bank of Commerce.

Some bankers feel that the phased manner approach for foreign banks' entry leaves a lot to be desired.

"Why should I today consider buying an existing bank, only to have to dilute my holding four years hence," questioned Bart Hellemens, CEO of ING Vysya Bank.

Post April 2009 foreign banks may dilute their holding to the extent that at least 26 per cent of the paid up capital is held by resident Indians.

Players like ABN Amro, which is looking at the subsidiary model feels this would enable foreign banks to draw local currency as business grows.

Since the RBI has hinted that from 2009 foreign banks would have a greater leeway when it comes to acquisition, "this is a clear message to local banks to shape up or ship out," said Jaspal Bindra, general manager (south Asia), Standard Chartered Plc.