RBI issues discussion paper on new banking license

The Reserve Bank on Wednesday issued discussion paper for the entry of new private sector banks in which it proposed to bring down the foreign investment in new private sector banks to below 50% from 74%. It is believed this suggestion of RBI can help some lenders in retaining their Indian-owned status as two leading private sector lenders- ICICI Bank and HDFC Bank had lost the status of Indian-owned banks.

RBI said, "Since the objective is to create strong domestic banking entities and a diversified banking sector ... aggregate non-resident investment, including FDI, NRI and FII in these banks could be capped at a suitable level below 50% and locked at that level for the initial 10 years."

The two private sector lenders ICICI Bank and HDFC Bank have been categorized as foreign-owned, Indian-controlled lenders, as FDI in them had increased over 50 per cent when norms on calculating FDI changed to include all types of foreign investment including FDI, FII, NRI, ADR, GDR and foreign currency convertible bonds.

Possibly the new norms of calculating FDI might have repercussions on their downstream investment like in subsidiaries.

According to discussion paper the downstream investment of banks would not have impact on monitoring indirect foreign investment, if the foreign investment is below 50%.

But experts say, it is not clear whether these proposals if implemented will they cover existing banks or not.

KPMG Financial Services Tax Leader Punit Shah said, "It is not clear. However, it is possible that even the existing banks will have to comply with the new cap over a period of time for a level playing field."

Giving basis for putting restriction on foreign investment at 50%, the discussion paper said, "This would enable foreign capital to be used in the promotion of domestic banks ... This would allow for foreign technical collaboration in setting up domestic banks."

RBI released discussion paper on issuing new banking licenses to increase competition and expand the banking system. It has mentioned pros and cons of various norms such as minimum capital requirements and limits on promoters as well as foreign shareholding.

Currently RBI is taking into consideration applications from 18 foreign entities, including Goldman Sachs, Morgan Stanley, Industrial and Commercial Bank of China (ICBC) and National Australia Bank to start operations in India.