India plans to hike foreign investment cap in state-run banks to 49 per cent, source says

India is planning to allow direct foreign investment in state-run banks of up to 49 per cent, more than double current limits, according to a person directly involved in the policy discussions.

The finance ministry has been discussing the matter with the Reserve Bank of India (RBI), the country's banking sector regulator, over the past couple of months, said the person, adding that the proposal has yet to be finalised.

Foreign interest in India's banking industry is on the rise as evidenced by Dubai-based Emirates NBD's (ENBD.DU) recent $3 billion purchase of a 60 per cent stake in RBL Bank (RATB.NS) and Sumitomo Mitsui Banking Corp's $1.6 billion acquisition of a 20 per cent stake in Yes Bank  which the Japanese lender later raised by another 4.99 per cent.

State-run banks are also seeing interest from overseas investors and raising the foreign ownership limit will help them gain more capital in the coming years, the person said.

The Nifty PSU Bank index (.NIFTYPSU) rose as much as 3.02 per cent to a record high of 8053.4 after the Reuters report, and closed the session 2.22 per cent higher.

NARROWING THE GAP

A second source confirmed a hike from the current cap of 20 per cent is under discussion, adding that the move is also part of an attempt to narrow the gap between regulations for government-owned and private banks. India allows foreign ownership of up to 74 per cent for private lenders.

The proposal to increase the cap for state-run banks to 49 per cent has not been previously reported.

Both sources declined to be identified as discussions are not public. India's finance ministry and the RBI did not immediately respond to Reuters' emails seeking comments.

India's robust economic growth - averaging 8 per cent over the past three fiscal years - has led to rising demand for credit, increasing the attractiveness of the country's lenders. Deals in India's financial sector jumped 127 per cent to $8 billion between January and September.

TWELVE BANKS

India has 12 government-owned banks, with combined assets of 171 trillion rupees ($1.95 trillion) as of March that account for 55 per cent of the banking sector.

The government plans to retain a minimum shareholding of 51 per cent in state-run banks, according to the first source. At present, the government has much higher ownership in all 12 banks.

Current foreign ownership in state-run banks ranges from a high of about 12 per cent in Canara Bank (CNBK.NS) to near zero in UCO Bank (UCBK.NS) as of September 30, according to data from stock exchanges.

In general, state-run banks are viewed as weaker than their private peers. Often tasked with providing credit to less affluent sections of society and opening branches in the hinterlands, the banks have been more prone to bad loans and have had weaker returns on equity.

KEEPING SAFEGUARDS

The RBI has taken a number of steps in the past few months to reduce and ease regulations in the banking sector, while becoming more allowing foreign banks to own larger stakes in Indian private lenders.

But certain safeguards will stay to avoid arbitrary control and decision-making, the first source said, adding that a cap on voting rights of 10 per cent for a single shareholder will remain in place.

($1 = 87.8950 Indian rupees)