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Higher FDI may help banks to meet capital norms

Author: Debasis Mohapatra/Monday, January 22, 2018/Categories: Banking & Financial Services

Higher FDI may help banks to meet capital norms

Mumbai, January 22 - Proposal to further liberalise FDI in banking sector can help Indian banks to raise capital to meet Basel norms apart from improving governance and service delivery, analysts said.

According to reports, the government is mulling to allow 100% FDI in private banks and 49% in public sector banking space in a bid to help banks meet capital requirements.

“Higher FDI in banking space is a good idea. It could potentially help banks garner capital apart from improving governance standards,” Udit Kariwala, Senior Analyst (Financial Institutions) at India Ratings and Research told the Finapolis.

He also said that level of interest of foreign players in public sector banks would hinge on valuations as the current limit of 20% FDI remains largely underutilized.

“Foreign ownership could also improve overall efficiency and bring in expertise,” Kariwala said.

Currently, FDI of up to 49% is allowed in private banks on automatic route, while up to 74% needs the government approval. Similarly, foreign holding in public sector banks is allowed up to 20% as of now.

If the proposal is approved, it will help banks, especially public sector lenders, to raise capital at a time when they are reeling under high non-performing assets (NPA) burden.

According to data released by the RBI, the gross NPA of banking sector stood at around Rs 7.5 lakh crore by the end of September quarter of this financial year. Bulk of the bad loans has emanated from the public sector banking space and stood at Rs 7.34 lakh crore. Meanwhile, NPAs stood at Rs 1.02 lakh crore for private sector banks by the end of this period.

Huge NPA in the system has forced banks to create higher provisions towards loan losses, eating into their capital base. Banks are also forced to resolve bad loan accounts taking huge haircuts, which has adversely impacted their profitability.

Against this backdrop, the proposal to increase foreign holdings seems to be driven by the factor of infusing capital in banks, which can in turn lead to higher credit growth in the system.

“Higher FDI in public sector banks can save the government from frequent capital infusion,” Kariwala said. According to a report by credit rating agency Fitch, Indian banks will require around $65 billion of additional capital to meet new Basel III capital norms.

Banking stocks, especially those of public sector banks, have surged around 3% in the last one week owing to reports of higher FDI cap along with sound start to the earnings season.    

Meanwhile, representatives of banking employee association are opposed to any such move of raising FDI limit.

“We are opposed to any such move as banks belong to a sensitive sector in the Indian financial system. Allowing FDI indiscriminately will hurt the banking sector as a whole and will not serve any purpose,” CH Venkatachalam, General Secretary of All India Bank Employees Association (AIBEA) said.  

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