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RBI governor Raghuram Rajan has developed the habit of being in the news for all the right reasons. In a recent announcement, he said that the central bank would unveil new norms for entry of foreign banks in the country which would also allow for takeover of local banks. Naturally, small and mid-sized banks started moving higher on the news.
However, it is too early to celebrate as allowing foreign banks to acquire Indian banks is difficult if not an impossible task. Apart from the politics involved behind it, the trade unions and the aggressive nature of operations will be a big hindrance.The case of Dhanalaxmi Bank is a case in point, where an aggressive new management could not adjust with the conservative middle management and trade unions.
Selling public sector banks is out of question as it would require legislative changes. No government, especially the current one, would like to commit to a cause which brings it in confrontation with the strong banking unions.
That leaves the regional, community banks and the privately owned ones. Regional banks, which now have branches across the country are one of the most conservative ones. With roots deep in their own community and a work culture that promotes conservatism, it is unlikely that they would be willing to sell off to a foreign bank.
That leaves the privately owned banks like Kotak Mahindra Bank, IndusInd Bank, Yes Bank and the NBFCs which make good takeover targets. But here too, there will be issues, but those are external to the banks.
A report by Macquaire Equities Research written by Suresh Ganapathy and Parag Jariwala points out that the preferred subsidiary route of operation in India by the governor will have few takers in the market. Presently foreign banks operate through the branch route and converting to the subsidiary route would attract stamp duty and other taxes over which RBI has no control. One of the biggest Indian institution that scares a foreigner away are the tax authorities. Few would like to deal with them unless all issues are transparent and there is a guarantee that no retrospective tax will be levied.
There is another issue that the report highlights which can and should act as a deterrent- it is the issue of reciprocity. Indian banks are not allowed to operate with the same freedom in foreign countries. Unless these countries liberalise their banking sector, Indian policy makers and trade unions would have a genuine reason to complain.
In short,its too early to expect any foreign banks to come to India. At best, we can hope to attract foreign returned Indian bankers like Vikram Pandit, which is as good as getting a bank minus the infrastructure.
