Is India Heading for Foreign Ownership of Banks?

The Reserve Bank of India (RBI) has a limit of 15% on ownership by non-residents of the equity of an Indian bank, a limit that is augmentable on a case-to-case basis but remains on the statute books to this date. And yet in 2018, the Mauritius-based Holding Company of the Canadian company Fairfax was allowed to purchase 51% equity of the Catholic Syrian Bank of Kerala.

Neither the Central government, nor the RBI has explained why the 15% limit was violated in 2018, while in 1994 (within the neo-liberal period itself), the attempt made by the Thailand-based S S Chauwala group to acquire control over 34% equity of the same bank was, quite rightly, rejected.

What is more, moves are reportedly afoot to sell the IDBI, too, to a foreign-owned private entity. Though it is not classified as a public sector bank, the government-owned Life Insurance Corporation of India (LIC) has majority equity ownership of it since 2019.

Notwithstanding protestations to the contrary, therefore, a quiet shift appears to be taking place toward allowing foreign entities to take control of Indian banks. Why this should be happening is never explained. Even the argument that this is a way of attracting foreign finance, which is the usual excuse advanced for such major policy shifts, has not been advanced in this case. This excuse, of course, would not stand scrutiny in the present case: the financial inflow on account of the purchase by the foreign entity itself is quite minuscule: Fairfax acquired ownership over the Catholic Syrian Bank with a paltry sum of Rs 1,200 crore, of which they even recouped almost half, Rs 592 crore, in June 2024 by selling a mere 9.72% equity. And as for foreign ownership of banks creating an ambience that is conducive to the inflow of finance, that is an utterly facile argument.

The strict implementation of RBI’s 15% limit after all had not deterred financial inflows earlier; and if financial inflows are being replaced by outflows at present, the reasons for it lie elsewhere (for instance Donald Trump’s tariffs) and cannot be negated by the sale of a few banks.

Why then is foreign ownership of banks being quietly allowed when its implications are widely recognised as being extremely deleterious for the economy (for otherwise the 15% ceiling would not have been imposed in the first place)?

It would, of course, be argued that the deleterious effects of foreign ownership per se of banks are greatly exaggerated. The RBI has rules about Indian banks’ holding of foreign assets, which generally restrict such holding, and as long as these rules are followed, who owns the bank does not matter as much. Even if we accept this argument, it still does not answer the question of why an Indian bank should be given over to foreign control.

And the argument that foreign ownership would improve the management of the bank is utterly invalid. In fact, foreign control, as the example of the Catholic Syrian Bank shows, eliminates credit to small borrowers, who are supposed to be the beneficiaries of the priority sector lending scheme, while enhancing greatly the emoluments of the top management.

Besides, foreign ownership of banks becomes precisely the instrument for exerting pressure to remove the existing restrictions on Indian banks’ holding of foreign assets. The removal of such restrictions, by enhancing the holding of foreign assets, will also enable foreign-owned banks to become more involved in financing speculative activities.

Such activities are riskier, and for that very reason more profitable on average in an ex ante sense. When the going is good, and speculation is paying well, banks engaged in such activities earn high profits, from which not a penny, however, accrues to the depositors. But when speculation ceases to be paying and banks incur losses, and even face bankruptcy, it is the depositors who have to face the prospects of losing their accumulated savings.

From the point of view of the mass of depositors, therefore, a bank engaged in financing speculative activities is much worse than a bank engaged in non-speculative lending. And foreign ownership of banks, by pressurising the RBI to remove restrictions on their holding foreign assets, will also expose the Indian depositors to the dangers of speculation from which they have nothing to gain but everything to lose.

This is not just idle guesswork. When the housing “bubble” burst in the US in 2008, banks from all major metropolitan capitalist countries were exposed to have been involved, directly or indirectly, in financing that bubble, and were consequently saddled with large amounts of “toxic assets”, that is, assets that had become worthless. They had to be rescued by massive government bail-outs; but such bail-outs still entailed substantial losses for depositors.

The one country where the financial system remained unscathed by the collapse of the housing bubble was India. The magnitude of foreign assets in the balance sheets of Indian banks was minuscule; and within their foreign assets the magnitude of toxic assets was even more so.

It is only the ICICI Bank that had some foreign and even toxic assets, but the public sector banks were almost totally clean. Such a situation may not recur in future, and the Indian financial system may not retain whatever robustness it had, if foreign ownership of Indian banks is allowed.

Allowing foreign ownership of banks, however, is the direction in which neo-liberalism will be pushing India. This is not only because neo-liberalism opposes all government restrictions (especially of Third World governments), such as the 15% limit on foreign equity ownership, but also because foreign ownership of Indian banks gives imperialism a leverage vis-à-vis the Indian economy (and neo-liberalism we must remember is an imperialist strategy). The foreign owner of a bank would have the backing of the foreign state, while the Indian owner of a bank would not.

Neo-liberalism has already significantly reversed the forward steps taken by the Indian financial sector during the dirigiste period compared with earlier. For instance, even though priority sector lending norms remain in place and have not been done away with, the definition of priority sector has been so widened that those for whom such norms had been put in place in the first place, namely, the farmers, the small producers, the small businesses and other marginalised segments, are substantially excluded from institutional finance.

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As a study by the All-India Democratic Women’s Association shows, non-bank financial companies (NBFCs) and microfinance institutions (MFIs) get loans from banks at no more than 10% interest rate but lend to impoverished women borrowers at 26% interest rate, in a manner reminiscent of the old village money lender of the colonial era (who also often accessed bank finance for his usurious moneylending).

What is more, bank loans to NBFCs and MFIs are now counted as part of priority sector lending. The basic purpose of bank nationalisation, which among others, was to make bank finance directly available to marginal borrowers in sectors like agriculture, small industries and small businesses, by-passing all intermediaries, has been undermined.

On the other side, the entire banking system, including even the public sector banks, has become subservient to big business, even though the idea behind bank nationalisation was to break this nexus and to impose social control over credit disbursement. Big business not only corners the bulk of bank credit, but also defaults on its repayment obligations with impunity.

Here again, in other words, despite the existence of public sector banks (though these too are nowadays characterised by a falling share of government equity), a situation similar to the old days when monopoly houses had close nexus with banks (in fact each house had its own bank), is being reinstituted. The movement again is away from the vision of social control over disbursement of credit.

This movement will get a further fillip from foreign ownership of Indian banks. The marginal borrowers will be further cut out from direct access to bank credit; big business will be further nourished with bank credit; and now, on top of all these, bank credit will flow towards foreign assets and speculative activities. This is no better than one expects from the fascistic elements that currently rule the country, but needs to be stoutly resisted.

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.