Reserve Bank of India might have a rescue plan for the struggling banks, by executing the proposed merger of capital-starved Lakshmi Vilas Bank (LVB) with the local support of Singapore’s DBS Bank.
This merger may have a huge impact of benefit, by not only expanding up more options for the banking regulatory but also opens up an opportunity for the wholly-owned subsidiary structure of the Indian operations from being suffered from an adverse development at the parent organization.
The arm of Singapore’s DBS bank was the first foreign bank to have received a banking license after the allowance of foreign banks by the central bank to set up a wholly-owned subsidiary in the year 2014. This subsidiary structure has brought the lender on par with local banks, by allowing them to open up branches anywhere in the country. But when we look at the encouragement provided by RBI to set up wholly-owned subsidiaries in India, it was seen that it has not been made compulsory for them to develop one.
Mr. Sidharth Rath, the chief executive officer and managing director of State Bank of Mauritius which is the second foreign bank to set up a wholly-owned unit in India, has given out his words of praise calling it a “win-win situation” for the regulatory, customers and the acquiring bank. He has also mentioned regarding their startup bank looking to see the growth on the strength and not keen on looking at the inorganic opportunities for now, but also stated that they might have a chance to consider in future.
In accordance with the World Trade Organization rules, new foreign banks may have their licenses denied when their share of assets, considering both on and off-balance sheet, in India exceeds 15% of the total assets. When we look at large foreign banks, they all come under primary wholesale banks with niche retail presence, and they are pretty much aware that unless they have a pan-India footprint, they cannot get into competition with the likes of HDFC Banks and Private Bank.
A senior banker has shared that LVB is an extremely trader-centric bank and an International bank looks at a pan-India footprint and not so much of a regional footprint. He also added that DBS has bought 556 branches of which 200 them belong to Tamil Nadu alone. Which he thinks that is not going to offer any net business as such.
The merger of two banks however makes economic sense as its growth in Singapore is now saturated, and obviously has to look at markets like India to expand operations. The main challenge to be taken into account is that foreign banks have their staff well trained with their digital skills and they possess strong underwriting processes when compared to Indian banks, which have more of a traditional client-focused system of approach.