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Private, foreign banks to gain from new FDI rules

A hike in foreign direct investment limits in the banking sector is likely to rekindle interest among global giants in the country's private banks and lead to consolidation, bankers and analysts said on Thursday.

Tough regulatory curbs will however keep foreign investors from picking up stakes in state-run banks, which dominate the sector with a more than 75 per cent share of deposits and outstanding loans.

"The new rules will see tremendous interest among foreign investors," K R Ramamoorthy, chairman of Vysya Bank, said.

Vysya is 20 per cent owned by Bank Brussels Lambert, a member of the ING Group.

The government decided on Wednesday to allow 49 percent direct investment from all sources in India's banking sector subject to Reserve Bank of India approval.

Earlier, investment by expatriate Indians was limited to 40 per cent and direct foreign investment to 20 per cent.

Global banks like Citibank, HSBC and ABN-AMRO Bank have previously expressed interest in picking up stakes in Indian banks, but regulatory curbs have curtailed their plans.

"HSBC and Citibank will try and pick up stakes in some old private sector banks which will allow them to expand their network," said Manish Karwa, analyst at Pranav Securities.

"Over a period of time, I do see consolidation in the old private banking sector due to the new rules," said Rajesh Sundaresan, analyst at Credit Suisse First Boston, Hong Kong.

The RBI currently restricts the number of branches that can be opened by foreign banks to 12 per year and analysts say old private sector banks are prime picks as they give a strategic investor access to low cost deposits and large branch networks.

These banks have a niche clientele, but have fallen behind in technology making them vulnerable in a competitive environment.

Some of their founders are known to be looking for partners as competition to raise capital becomes stiffer, limiting their access to technology and restricting their ability to grow.

New private banks

Analysts said some of the new tech savvy and more efficient private sector banks, set up after India opened up its economy in the 90s, like UTI Bank, ICICI Bank and Centurion Bank will also benefit from the new rules.

"UTI Bank, which is looking for a foreign partner will be the immediate beneficiary," an analyst at a foreign brokerage said.

The bank, which called off a messy merger with another private sector bank, Global Trust Bank, last month is looking to raise capital by bringing in a new partner.

Shares of UTI Bank were up 3 per cent at Rs 33.20 in midday trade, while the Sensex was down 0.52 per cent.

ICICI Bank, in which financial services firm ICICI holds a 47 per cent stake, might also see foreign investors lining up as the founder has made clear it wants to bring its stake down to less than 40 per cent in the current financial year.

Shares of ICICI Bank were up 2.65 per cent up at Rs 150.80 in midday trade.

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