Banking stocks rallied yesterday on the FM’s announcement of allowing 49% FDI in banking companies. Also hopes of an interest rate cut fueled the sentiment in the sector.
Although, the move of allowing 49% FDI in banking sector is commendable, it should be noted that the higher limit is only for the private sector banks and not for public sector banks (PSBs). For them the cap of 20% still continues.
The government had earlier decided to bring down its stake in the nationalised banks to 33%. However, it would like to retain the management control of the bank. So even in the long run PSBs might find it difficult to allot 49% stake to the foreign investor.
For private banks it may open the gate for foreign banks to enter into a strategic partnerships with Indian banks. But it becomes important for them to consider the work culture, compatibility, system and staff strength before entering into any tie-up. The government’s decision to make all the foreign investments repatriable in foreign exchange could however induce the foreign banks to pick up strategic stakes in the private sector banks. This will eventually improve the asset growth of banks in the long run and would lead to a pick up in consolidation (M&A) activity among the private sector banks.
The FDI limit of 49% is inclusive of FII limit in the bank. Earlier, the overall foreign investment allowed in a banking entity was limited to 40%, with a sub-cap of 20% for FDI. However, NRIs were allowed to take up the entire 40%.
The key beneficiaries of this decision will be ICICI Bank and HDFC Bank. (In ICICI Bank FII limit has already reached to 20%, which could now increase further.) Their superior profitability, higher margins, relatively better technology and low NPAs are likely to attract foreign investors. Increase in FDI limit in infrastructure related sectors is also positive for ICICI and HDFC, as it will boost their loan demand.
Among the others, Vysya Bank has recently offered 20% stake to Bank Brussels, Lambart (a bank of Dutch ING Group). UTI Bank and IndusInd Bank have already announced their decision to seek foreign partners. In Global Trust Bank, IFC of Washington already holds a 10.4% stake, which it could increase further. Old private sector banks like Federal Bank and Karur Vysya Bank could also attract some foreign investments.
Rise in FDI limit signal a positive indicator for the banking companies considering the stringent regulation imposed on the sector. However, the winners would be only those banks with good quality of assets and ability to maintain the growth rate in the competitive environment.