Government may allow 100% FDI in banking: ReportLast updated on Jan 17, 2018, 09:31 pm
After allowing 100% FDI (Foreign Direct Investment) in aviation, single-brand retail, and construction, the Centre is now considering to hike the FDI limit in the banking sector to 100%.
The Narendra Modi-led government is thinking of allowing 100% FDI in private banks and 49% FDI in public sector banks.
Discussions are currently ongoing between Finance Ministry and the concerned departments.
Arun Jaitley to meet PM Modi for FDI hike approval
The Finance Ministry, the Department of Industrial Policy and Promotion (DIPP), and the Indian Banks' Association (IBA) are discussing the hike in the FDI limit in the banking sector. They are currently assessing the impact of allowing 100% FDI in private banks, said sources.
Also, Finance Minister Arun Jaitley may soon approach PM Narendra Modi for the approval of the FDI cap hike.
74% FDI currently allowed in private banks
In India, FDI in the banking sector is currently capped at 49% in private banks through the automatic route (without permission/prior approval of the government).
However, through the government route (with government's approval), 74% FDI is permitted in private banks. In public sector banks, 20% FDI is allowed.
The government now wants to allow 100% FDI in private banks and 49% in PSBs.
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100% FDI doesn't mean complete ownership by foreign entities
Former RBI Deputy Governors, R Gandhi and KC Chakrabarty, welcomed the proposed move to raise the FDI cap in banking.
Gandhi feels a higher FDI limit will result in better valuations of banks, in turn helping the government get a good value for PSU bank stakes.
Chakrabarty added 100% FDI may not necessarily mean allowing a foreign bank to buy a domestic bank.
FDI hike to improve banks' valuations
Increasing the permissible FDI limit in the banking sector is expected to improve services and also let banks meet minimum capital requirements. United Bank of India MD, Pawan Kumar Bajaj said FDI cap hike would help in improving the valuations of banks in India.
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Single entity can invest only 10% in banks: RBI
Meanwhile, former RBI Deputy Governor Harun Rashid Khan said "measured steps" must be taken in opening up the "sensitive" baking sector to 100% FDI.
He advised "measured hikes" as 100% FDI may not make any sense in some cases.
Also, Chakrabarty said even if the government allows 100% FDI, a single entity can only invest 10% in a bank as per RBI rules.
Government decided to modify FDI norms for other sectors
The Centre recently decided to allow 100% FDI through automatic-route in construction, single-brand retail trading, and aviation sector. However, foreign airlines can invest up to 49% in state-run Air India under government-route.
Rules were modified for allowing foreign entities to invest up to 49% in power exchanges through primary market.
FDI rules were relaxed for medical devices and audit companies receiving foreign investments.