Indian bank shares rose on a report the government is considering allowing foreign investors to own larger stakes in the country’s lenders.
The Bankex Index, a gauge for 10 lenders, rose 0.7 per cent to a new record high in Mumbai on Thursday after earlier surging as much as 2.5 per cent. Gains were led by privately-owned HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. However state-run lenders, lumbered with festering bad debt, fell.
Prime Minister Narendra Modi’s administration is holding talks to raise the foreign investment limit in private sector banks to 100 per cent from 74 per cent and in state-run banks to 49 per cent from 20 per cent, the Business Standard newspaper reported citing a government official it didn’t identify. Foreign investment includes foreign direct investment and overseas portfolio investment through various routes.
“This is sentiment positive, but magnitude of impact should be marginal as the gap between current foreign institutional investor shareholding and upper limit is wide for most banks,” Nilanjan Karfa and Harshit Toshniwal, equity analysts at Jefferies India Pvt., wrote in a report. “The Reserve Bank of India’s comfort with such a change will also be important to watch.”
A higher cap would make it easier for banks to meet capital requirements under global Basel regulatory standards. However, the report cited the unnamed official as saying the banking regulator may have some objections to the move, and Rajiv Kumar, secretary in the government’s Department of Financial Services, didn’t reply to the newspaper’s request for comment.
This isn’t the first time the issue has been discussed: the government was mulling increasing the maximum amount foreign investors can hold in state-run lenders, people familiar with the matter had told Bloomberg News in 2015. A few months earlier, an RBI deputy governor had said that while India has a long history of welcoming foreign banks, it is cautious about allowing their expansion.
At a time when the majority of state-run banks “are struggling with low credit growth and high asset quality risks, it has been difficult to generate investor interest even at relatively lower valuations than their private peers,” the Jefferies analysts said. “We don’t expect higher FDI limits to change things materially, unless the government is able to bring in long term strategic investors.”