Finmin Against 49% Cap on FDI in New Banks

24 Mar 2011 Evaluate

The finance ministry has opposed the Reserve Bank of India’s suggestion to restrict foreign direct investment in new banks to 49%, saying the change in norms will hurt investor sentiment. It has also asked the central bank to bar real estate firms from seeking banking licences and alter conditions relating to financial inclusion and stake dilution by promoters.

The central bank’s suggestion was part of its comments on the draft guidelines for new bank licences, which it submitted to the finance ministry earlier this month. The RBI was expected to issue the draft guidelines for new bank licences before the end of this month, but the differences of opinion with the finance ministry could delay the process.

Without the exemption, these banks would become foreign banks if overseas investment in them crosses 50%. This would lead to imposition of the same restrictions on them that apply on foreign companies. The government is already struggling with policy issues in respect of private lenders, such as ICICI Bank and HDFC Bank, where foreign holding is more than 50%.

The ministry has also suggested that the RBI should disqualify any group that has exposure to real estate from seeking a banking licence. The central bank had suggested that companies that derive 10% or more of their income or assets from real estate, construction or broking activities should not be eligible. The finance ministry has also opposed the RBI’s suggestions on financial inclusion and stake dilution by promoters of new banks. The central bank had proposed to make it mandatory for new entrants to have at least 25% of their branches in rural areas with population of less than 10,000.