The proposed merger of capital-starved Lakshmi Vilas Bank (LVB) with the local arm of Singapore’s DBS Bank may serve as a template for the Reserve Bank of India (RBI) to rescue other struggling banks.
Allowing a foreign bank to acquire a weak local rival not only opens up more options for the banking regulator as it seeks well-capitalized entities with deep pockets, but the wholly-owned subsidiary structure of the Indian operations also ring-fences the local entity from being affected by an adverse development at the parent organization.
DBS was the first foreign bank to receive a banking licence after the central bank allowed foreign banks to set up a wholly-owned subsidiary in 2014. The subsidiary structure brings the lender on a par with local banks, allowing them to open branches anywhere in the country.
While RBI encourages foreign banks to set up wholly-owned subsidiaries in India, it has not made it compulsory for them to create one.
“It’s a brilliant strategy to acquire an Indian bank. It’s a win-win situation for the regulator, customers and the acquiring bank. We are right now a startup bank looking to grow on the strength of our book. We are not looking at inorganic opportunities as of now. However, we may look at it in the future,” said Sidharth Rath, managing director and chief executive officer, State Bank of Mauritius, the second foreign bank to set up a wholly-owned unit in India.
That said, RBI’s rules limit foreign banks from dominating the Indian banking system as there is a threshold beyond which they cannot operate.
According to World Trade Organization rules, licences to new foreign banks may be denied when their share of assets, both on and off-balance sheet, in India exceeds 15% of the total assets of the banking system.
“Existing foreign banks with branch mode of presence have not been enthusiastic about converting into a wholly-owned subsidiary (WOS) because they don’t gain in a business sense. Their business ambitions may not be to become a pan-India bank. If a foreign bank wants to become a WOS with a larger ambition of expansion in India, this will be heartening,” said Anand Sinha, a former RBI deputy governor.
The large foreign banks in the country are primarily wholesale banks with niche retail presence. These banks are aware that unless they have a pan-India footprint, they cannot compete with the likes of HDFC Bank and ICICI Bank.
“LVB is an extremely trader-centric bank with customers spread across the Nadar community. An international bank looks at a pan-India footprint and not so much regional footprint. DBS has bought 556 branches of which 200 branches are in Tamil Nadu alone. It’s not going to give a net business,” said a senior banker with a large foreign bank.
For DBS, however, the deal with LVB makes economic sense as its growth in Singapore is now saturated, and it has to look at markets like India to expand their operations. Following the setting up of DBS Bank India Ltd (DBIL) last year, it was also looking to establish over 100 customer touchpoints across 25 cities. Currently, DBIL has just about 30 branches in India.
The other challenge that foreign banks face is in aligning the two business cultures post an acquisition. Foreign banks, staffs are trained in digital skills and have strong underwriting processes, compared to Indian banks, which have a more traditional client-focused approach.
