The Hindu Business Line : PSBs want Fed Reserve to ease acquisition norms

Expanding network
RBI had far exceeded its commitment under the WTO commitments for providing access to the domestic banking market.
Banks, including the RBI, are peeved that the Federal Reserve had failed to reciprocate.
Indian banks eye opportunities for acquisitions in the US in the sub-prime scenario.

C. Shivkumar

Bangalore, Jan 28 Public sector banks (PSB) want the Government and the Reserve Bank of India to exert more pressure on the American Banking regulator, the Federal Reserve for allowing for acquisitions and for branch expansion.

A top official of a public sector bank said that some of them have already lined up proposals for acquisitions of small US banks. However, the major impediments were the American Banking regulations. Under the US International Banking Act of 1978, acquisition of voting shares in American banks is restricted to only 5 per cent. In fact, the Indian Bank Regulation Act is less restrictive. Under Indian regulation, there is no ceiling on acquisition but voting rights are capped at 10 per cent.

Bankers said that given the restrictive market access conditions, the option was to expand the branch network, though this was cumbersome. So far, only the long-pending branch expansion proposal of the State Bank of India has been approved by the Federal Reserve. Bankers said that though the US Federal Reserve Regulations insist on reciprocity for branch licensing, they have seldom followed it. In fact, this was pointed out by none other than the RBI’s Deputy Governor, Mr V. Leeladhar.

WTO commitments

Addressing the Bank Economists Conference last year, he said the RBI had far exceeded its commitment under the WTO commitments for providing access to the domestic banking market.

Banks, including the RBI, are peeved that the Federal Reserve had failed to reciprocate, despite the fact that foreign banks are permitted to open as many as 75 branches between 2003 and 2007. Under the commitment to the World Trade Organisation, the RBI is allowed to restrict access to foreign banks if their share in assets, both on and off balance sheet, exceeded 15 per cent of the total banking system. By the RBI’s own admission, this share was about 49 per cent as on January 2007.

Sub-prime woes

Bankers now said that given the enormity of the sub-prime crisis in the US, many banks were likely to face failures, especially the smaller bankers. This was especially in a situation where large international banks faced with capital pressures. Citibank for instance had received a foreign capital injection of $7.5 billion after the $18-billion write off that brought the ratio near the tier one thresh hold of 6 per cent.

Large Indian banks, the officials said, were in a position to acquire and recapitalise the smaller entities. Such acquisitions, bankers said, would shorten the time lag for entry into the US banking market. Some of the small banks have already been identified by the large domestic public sector banks for potential acquisition, though a “green light” would have to come from the Government and the RBI they said.