India Changes Banking Rules, May Attract New Lenders

The Indian parliament’s lower house approved changes to banking laws, raising a cap on voting rights and giving more regulatory power to the Reserve Bank of India in a move that may attract investment to the industry.

The limit on voting rights of shareholders in state-controlled lenders was increased to 10 percent from 1 percent, and in other lenders to 26 percent from 10 percent. The new law allows state-run banks to raise capital through rights offerings and free shares.

The additional powers for the banking regulator take it a step closer to issuing new bank licenses, part of a process that has been under way for more than two years. The higher limit on voting rights will boost investor interest in banks, Nitin Kumar, a Mumbai-based analyst at Quant Broking Pvt., said by telephone before the bill was passed.

“This is a sentiment booster,” said Kumar. “Private-sector banks including Yes Bank Ltd., ING Vysya Bank Ltd. and Kotak Mahindra Bank Ltd. stand to benefit most.” Flexibility for state-run banks in raising capital will be seen as positive by rating companies, he said.

The amended law will allow the Reserve Bank of India to take control of a bank and inspect the books of lenders’ associate enterprises. The final rules for new banking permits will be issued after the central bank has received the new regulatory powers, governor Duvvuri Subbarao said last month.

New entrants would compete with State Bank of India, the nation’s largest, and ICICI Bank Ltd., the biggest private lender.

India’s 26 state-run banks account for 76 percent of the nation’s outstanding loans as of March 31, according to the Reserve Bank of India. The 20 private domestic lenders had a 19 percent market share and 40 foreign lenders accounted for the remaining 5 percent.

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