Banks will get help in raising capital.
The Government of India is planning to increase the limit of foreign investment (FDI) in government banks to 49%, which is more than double the current limit. This claim has been made in a recent report by Reuters. According to the report, the Finance Ministry has been discussing this proposal with the Reserve Bank of India (RBI) for the last few months. However, this proposal has not been finalized yet.
The interest of foreign investors in India’s banking sector is continuously increasing. Examples of this are Dubai’s Emirates NBD recently buying a 60% stake in RBL Bank for $3 billion, and Japan’s Sumitomo Mitsui Banking Corp buying a 20% stake in Yes Bank for $1.6 billion, which they later increased by another 4.99%. The interest of foreign investors in government banks is also increasing. Increasing the foreign ownership limit will help these banks raise more capital in the coming years.
For this reason the limit may be increased
A source in the report confirmed that discussions are underway to increase the current 20% limit. He said that this step is also part of an effort to reduce the difference between the rules of government and private banks. The limit of foreign investment in private banks in India is up to 74%. This proposal to increase the FDI limit in public sector banks to 49% was never made public before. Sources in the report said on condition of anonymity that these discussions are not yet public. However, the Finance Ministry of India and RBI have not said anything in this matter yet.
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Government’s share can be this much
There are currently 12 public sector banks in India, whose total assets as of March were Rs 171 trillion ($1.95 trillion), which constitute about 55% of the country’s banking sector. According to the first source, the government plans to maintain its minimum stake in these banks at 51%. At present, the government’s stake in all 12 banks is much higher than this. According to data till September 30, foreign investment in public sector banks is around 12% in Canara Bank, while it is almost zero in UCO Bank. Generally, government banks are considered weaker than private banks. They are often given the responsibility of giving loans to the poor and opening branches in rural areas, due to which the rate of bad loans is high and the return on equity is weak.
Security measures will continue
The RBI has taken several steps to ease banking sector regulations in the last few months and has also agreed to allow foreign banks to take larger stakes in Indian private banks. However, some safeguards will continue to be in place to avoid arbitrary controls and decisions. The first source said that the limit of voting rights for a single shareholder will remain at 10%.