Foreign banks: Was Rajan's mention of reciprocity the deal breaker?

The number of foreign bank branches in India soared to 861 in March 2022, from just 295 in FY17, even as the number of such entities in the country remained almost the same at 45. No, these banks were not on an expansion spree. As the Reserve Bank of India’s (RBI’s) Report on the Trend and Progress of Banking in India 2021-22 notes, this was mainly because DBS Bank (India) acquired Lakshmi Vilas Bank (LVB), operating through the wholly owned subsidiary (WoS) route.

The marked shift in the foreign-bank narrative in the post-reform period must also be seen in another context — the renewed talk of privatisation of a clutch of state-run banks. Then RBI governor Raghuram Rajan’s plea for more elbow room for foreign banks, articulated in Washington in 2013, also needs re-examining. 

In the 1990s and for much of the first decade of the new millennium, there was not a foreign bank which didn’t talk of wanting a large footprint in India — so much so that in 2002, the Dutch ING Group (through ING Bank) took over Vysya Bank. It was the first merger between a foreign and an Indian bank. 

The ING Bank-Vysya Bank transaction, which happened when Bimal Jalan was RBI governor, was bold enough to give rise to hopes that foreign banks would make more such acquisitions. It never happened. The RBI under Jalan also took a different stance when, in December 2003, HSBC picked up a stake in UTI Bank (now Axis Bank) — it did not allow the deal to go through.
 

But hopes soared again when Rajan, as Mint Road boss, speaking in Washington in October 2013, appeared to envision foreign banks even “taking over Indian banks, small Indian banks, and so on”, adding that “if you (foreign banks) adopt a WoS structure, we will allow you near-national treatment”. But Rajan’s use of the expression “near-national treatment” was made along with a caveat on reciprocity: “Your country should allow the same to our own banks.”

And, as the RBI’s Report on the Trend and Progress of Banking in India 2012-13 pointed out, “at end-March 2013, there were 43 foreign banks operating in India with 331 branches. As against this, there were 24 Indian banks with 171 branches abroad.” Clearly, India has been more favourable to foreign banks. Indeed, the RBI has made it a point to highlight over the years that its policies for foreign banks were not only compliant with India’s World Trade Organisation commitments, but also far more generous than other jurisdictions.

Was Rajan’s mention of reciprocity the deal breaker? We will never know.

Curiously, in August 2013, the RBI, in its discussion paper, Banking Structure in India: The Way Forward, also spelt out the reasons why foreign banks were needed in the country: “It arises primarily to increase competition, promote efficiency of the local banking system and also to bring in sophisticated financial services and risk-management methodologies which can be adopted by the domestic banks. Post crisis, domestic incorporation of foreign banks through the subsidiarisation route has acquired importance.”

It was speculated that the departure of Goldman Sachs, Morgan Stanley, and UBS from India in 2013 (after having won banking licences) may have triggered the RBI discussion paper and Rajan’s stance. This is unlikely; the exit of the global behemoths had more to do with the changed priorities at their head offices after the global financial crisis of 2008, and was less a comment on India as a business destination.

The reality is that there has been little by way of increase in freedoms for foreign banks — the position of Mint Road has not changed much. There is also nothing to suggest that the DBS Bank-LVB transaction was not an outlier. In fact, India now has only two foreign banks with full-service operations — Standard Chartered Bank and HSBC.

The upcoming Union Budget is expected to offer more clarity on the privatisation of state-run banks. The IDBI Bank sale is yet to go through; and ahead of the January 7 cut-off for expressions of interest, the government tweaked the minimum public-shareholding norm.

It is not unlikely that suitors may seek more reliefs for other state-run banks being privatised. In light of the DBS Bank-LVB deal and Canadian investor Prem Watsa’s Fairfax picking up a 51 per cent stake in the Thrissur-based CSB Bank in 2018, why not revisit the RBI’s August 2013 discussion paper?