The Gatekeeper

After months of dotting the i8217;s and crossing the t8217;s 8212; and some serious political football to boot 8212; the Central bank ti...

After months of dotting the i8217;s and crossing the t8217;s 8212; and some serious political football to boot 8212; the Central bank timed the much-awaited guidelines for foreign and private sector banks to coincide with the Budget blitz. And as the heat and dust around the Budget dies down, one theme emerges in the high-stakes roadmap: the RBI retains top-dog discretion and flexibility in regulating the banking sector.

Indeed, the reaction is muted, thanks to lack of transparency and caveats in the guidelines. Complains a senior foreign banker requesting anonymity, 8216;8216; 8216;8216;The guidelines still show ambiguity. It the RBI can accept or reject the shareholding patterns of various promoters for different reasons. It can interpret some of the norms to suit certain requirements.8217;8217;

Adds Bhaskar Ghosh, MD of private IndusInd Bank: 8220;For private banks, a significant extent of discretion has been retained by RBI for interpretation and dispensation of the guidelines. This lack of transparency creates scope for confusion and inhibits clear-cut strategy formulation.8221;

THE LONG WAIT AHEAD

It8217;s going to be a long wait for the 32 foreign banks in India. The two-stage process 8212; forming subsidiaries in the first stage up to 2009 and listing them on bourses thereafter 8212; is going to be painful. The worry: what8217;s the guarantee that the RBI/Centre won8217;t alter the norms later? The lack of long-term policy confidence is apparent. For instance, If a foreign bank wants to buy 5 per cent or more in a private bank, RBI says it will take into account the 8220;standing and reputation8221; of the foreign bank, globally as well as in India, and the 8220;desired level and nature of presence8221; of the foreign bank in India. 8220;This is very subjective and speculative8230; it8217;s not a clear-cut policy. It leaves many gaps,8221; said a Mumbai-based banker.

POLICY AMBIGUITIES

Ditto for the 31 private sector banks. The most significant part of the guideline is that there8217;s a five per cent cap on the stake of foreign banks and financial institutions in other private banks. But this can go up to 15 per cent in restructuring cases. As per the RBI, no entity can hold a stake of more than 10 per cent in a private bank and no bank having a presence in India can hold more than 5 per cent in any other private sector bank.

The government has allowed 74 per cent foreign investment in private banks. However, it limited an entity8217;s stake in private bank at 10 per cent. 8220;At the same time, the RBI says any higher level of acquisition will be with the prior approval of RBI and in accordance with the guidelines of February 3, 2004, for grant of acknowledgement for acquisition of shares. Does it mean you can go above 5 and 10 per cent levels?8221; questions a banker.

PREPARING FOR EXIT

There8217;s been speculation about the restructuring of promoter stake in private banks ever since the RBI came out with the draft norms for ownership pattern in 2004. A host of banks 8212; Federal, UTI, Indusind, among others 8212; are now looking at ways and means to sort out the ownership imbroglio. It8217;s clear that the RBI will have to look at each case separately. But the central banker is clear in one aspect: 8220;The guidelines are to ensure a diversified ownership and control in private sector banks so as to minimise the risk of misuse of leveraged funds,8221; it says.

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So, over the next few months, promoters are going to draft their gameplans to reduce stakes. For instance, 8220;We8217;ve written to the RBI asking for three years to shed our stake in Federal Bank and South Indian Bank,8221; confirmed an official of ICICI Bank, the second-largest bank in India after SBI. Also in the spotlight will be HSBC8217;s stake in UTI Bank and the Hindujas stake in Indusind Bank.

8220;It is not clear if RBI8217;s new guidelines on restrictions on single entities or groups of entities for the extent of shareholding apply to original promoters as well, or whether the separate dispensation on a 49 per cent ceiling for promoter holding still holds,8221; says Ghosh of Indusind Bank.

The next five years would see massive changes in the banking sector, especially in ownership and the presence of foreign banks. But the ambiguity, lack of transparency and the likely intrepretation in the future of norms are giving the bankers jitters.