The Reserve Bank of India recently asked the finance ministry to clear HSBC's plan to acquire a 15 per cent stake in UTI Bank.
The move was unprecedented since hitherto, all such proposals were cleared by the banking regulator itself.
Government officials interpreted the central bank's move as a "shying away tactic", since it had recently adviced the finance ministry to maintain the cap on voting rights for foreign investors in private banks at 10 per cent.
Citing precedence, the finance ministry lobbed the proposal back to the RBI.
The ministry is yet to decide on the RBI advice and an announcement is expected in the forthcoming Budget.
With most of the foreign banks in India operating as branches, a decision on whether to acquire a maximum permissible 74 per cent stake in an existing private bank, or alternatively, set up a 100 per cent subsidiary, hinges on the government's policy stance.
"Without linking voting rights to the shareholding, it does not make sense to have a presence in India through any channel other than the branch route," said the country head of a foreign bank.
Till about two months back, foreign banks were beginning to give final shape to their Indian plans. But the sudden change in stance by RBI has delayed their decision for sometime at least.
While the government had originally proposed to do away with the voting right cap, RBI's advice earlier this year against removing the cap, took even the finance ministry by surprise. A Bill to do away with the 10 per cent cap had already been cleared by the parliamentary standing committee.
The RBI is of the opinion that foreign banks should not be allowed to have a significant presence in India till Indian banks consolidated and built large balancesheets.
That may take time since the government needs to first give a go-ahead to nationalised banks to scout for partners. "The process will take at least 2-3 years before consolidation actually starts," says a government official.
Having undertaken minimal commitments in the banking sector under the World Trade Organistion's General Agreement on Trade in Services (Gats), India is not under pressure to ease restrictions on the entry of foreign banks, which have concentrated largely on the metro cities.
But time is clearly running out since the foreign banks, being private entities, want to take their investment decisions at the earliest.
