Foreign lenders won't buy local banks sans clarity: Experts

After the Reserve Bank governor Raghuram Rajan, over the weekend, said the central bank would release norms allowing foreign banks to take over small local banks, Sanjay Nayar, CEO and Country Head, KKR India commented that until the fine print is out, nobody will move in a hurry. A paper on subsidiarisation of foreign banks is expected shortly.

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Nayar told CNBC-TV18 that foreign banks being given a larger play could be a potential game changer for the sector. "Foreign banks buying smaller ones could be one way but just foreign banks becoming larger by becoming subsidiaries or whatever other form which gives them the ability to expand physically, bring in more capital and also bring in technology which is what they are good at and risk management is really the key need for India," he says.
Nayar does not think India needs foreign banks just for increasing financial inclusion. According to him, financial inclusion is one of the three-four objectives that needs to be achieved. Besides financial stability, larger credit growth in the corporate world especially, in the SME world, too are critical at this point.
The RBI governor had emphasized on two conditions while talking about increased access to foreign banks. First is reciprocity – which implies that Indian banks should be given the same treatment in the home country of the foreign bank, and second that these banks will be allowed to come in through only one route, either through branch or subsidiary, but not both.
But S Narayan, former finance secretary says governor Rajan’s comment on reciprocity may be a huge hurdle. He does not see the United States extending the same treatment so easily, which in turn rules out a large number of international banks looking at India. Below is the verbatim transcript of Sanjay Nayar & S Narayan's interview on CNBC-TV218 Sanjay Nayar Q: What is your sense on Raghuram Rajan's statements, if foreign banks are treated like any Indian private bank entity or almost like any private bank entity, they will be buying small banks, will it make sense for them? Sanjay: I think the foreign banks have been waiting for a clear policy on subsidiarisation for a long time and there are a lot of nuances but till we see the fine print I don't think anybody is going to move in a hurry. As far as foreign banks acquiring small banks I think it has to be a part of a larger banking structure question which the Reserve Bank of India (RBI) is anyway trying to address as we know through their recent papers for discussion. So let us assume that all that was to work out, I think there has to be a consolidation game.
Foreign banks buying smaller ones could be one way but just foreign banks becoming larger by becoming subsidiaries or whatever other form which gives them the ability to expand physically, bring in more capital and also bring in technology which is what they are good at and risk management is really the key need for India.
If you look from India's point of view, the key need is more capital, more sophistication and I think foreign banks can play a terrific role. So I think we don't have to limit the discussions just to acquiring of small banks, there is a larger question that RBI has to address as to what is the banking structure. It is a welcome thing if the details come out and it will also say which banks are serious about expanding in India and which are not. Q: There is this big priority sector requirement as well which foreign banks have invariably not been able to perform and in the last one year the RBI has even taken out exports while counting the priority sector for foreign banks, it is not yet done, they have been given five years to come up to speed. But once they are treated as Indian banks then you have to do 40 percent priority sector. Will that be a reason why people will have to acquire? Sanjay: That is just too much nuance too early. I think that India doesn't need foreign banks just for increasing financial inclusion. Financial inclusion is one of the three-four objectives that we want to achieve besides financial stability, besides larger credit growth in the corporate world especially, in the SME world. So foreign banks can play a lot of other roles. I would not limit this to a pure priority sector lending (PSL) discussion and hence eliminate the logic for expansion of foreign banks. But it all boils down to the fine print.
Ultimately people need branches and if it is again going to get stuck with the reciprocity then it will be a nonstarter and you cannot even achieve PSL if you don't get the branches right. So this debate in the media has become too early too quick but there is a lot of detail to follow. S Narayan Q: Many of the private sector banks, the smaller ones have run-up quite sharply in anticipation of them being likely takeover candidates but what is your sense on how many of them will eventually see takeovers by many of these larger banks because so many of them are still struggling to raise capital, many of them have limited amount of franchise etc. How hopeful are you? Narayan: Three thoughts here, first, I find it hesitant to accept that the RBI governor should make policy statements outside the country about the banking sector in India. I would have been much happier if he had made these policy statements in India rather than outside.
Two, the issue of reciprocity that he talked about is going to be a terrible obstacle to crossover because certainly the US government is not going to allow reciprocity so easily, so I think that rules out a large number of international banks looking at banks in India.
Third the question about small banks, if you look at the small banks here there are some which are very well balanced, mature, doing well, net interest margins (NIMs) are good, results are good, etc. There are others which are just skating along on the margin. So any takeover bid will have to be considered carefully - the potential, the footprint, the reach of the small banks because most of them are limited to two-three states and may be to tier II and III cities so it is very important for them to consider whether that is the geographical area and that is the kind of consumer reach that they want to have.
So I would say that there is going to be a lot of fairly close look at these banks before any thought of any takeover comes in. And as was already said there are other opportunities for expanding, extending network, putting up more branches without necessarily having to take over the smaller banks. So I see that the field is pretty much open at the moment following up on that speech. Q: You have worked closely with some of the small banks, some of them are actually community owned banks do you think that it will be resistance to ownership by a foreign bank and therefore many of these should not be even considered as potential candidates one day for an open offer by investors? Do you think these community based owned banks at least will not be willing takeover candidates? Narayan: I know some of the smaller banks fairly well, if I look at it I would say some of them where the ownership of the community is slowly getting thinner, I think would be willing to look at opportunities like this. There are others where still the community is holding fairly strongly together. So you can really break it up into two-three and these are well known in the market as to which of these would be options and which of these would not be options.