TALKS to sell majority stakes in two Indian banks have attracted interest from foreign peers in Japan and the Middle East betting on a fast-growing economy, but tighter regulations and valuation concerns could curb their appetite, say analysts and sources.

The rare opportunity for foreign banks to take controlling stakes in a market dominated by state-owned banks comes as existing investors in Yes Bank and IDBI Bank look to divest their holdings.

Banking sector deals in India, especially those involving foreign entities, are rare.

A full takeover of troubled Indian lender Lakshmi Vilas Bank by Singapore-based DBS Group in a regulatory-driven transaction in 2020 was the last major deal.

The top shareholders are looking to exit from the two banks about four years after they were roped in by the regulator and the government to help them recover from sharply worsening asset quality due to rampant lending that threatened their stability.Private sector lender Yes Bank, in which shareholders are looking to sell a 51% stake, has drawn interest from Japan’s Sumitomo Mitsui Banking Corp (SMBC) and Emirates NBD, Reuters has reported.

IDBI Bank, in which the Indian government and the Life Insurance Corp are collectively selling a 60.72% stake, has seen Emirates, Canada’s Fairfax Group, as well as local rival Kotak Mahindra Bank express interest.

The foreign interest in the two banks comes as the Indian economy is forecast to grow at 7.2% this year, making it one of the world’s fastest-growing major economies.

Demand for bank credit, which includes corporate loans and mortgages, is growing at twice the expected economic growth pace and gross bad loans in the domestic banking sector are currently at multi-year lows of 2.8% of total assets.

Similar to other major markets, inbound banking sector deals are tightly scrutinised in India. Given the sector’s importance and linkages with the broader economy, New Delhi is expected to field interest from bidders in countries it has good political ties with, analysts said.

“India’s growth story is promising, and corporates are looking to expand their businesses,” said Ashvin Parekh, managing director of Ashvin Parekh Advisory Services, which provides services to investors in banks.

“That is enticing these (foreign) players,” Parekh said.

Despite those attractions, stricter rules related to capital requirements and ownership restrictions, and state domination with government-backed banks accounting for nearly 52% of the bank credit have weighed on foreign banks’ operations in India.Regulations in India also require that the largest shareholder of a local bank, termed as ‘promoter’ under Indian regulations, must their reduce shareholding to 26% over a 15-year period.

Foreign lenders, including HSBC and Standard Chartered, accounted for only 3.4% of the banking sector credit as of March 2024, less than half of the 8.4% share they held in March 2000, according to the central bank data.SMBC has been in advanced talks with Yes Bank and its lead investor State Bank of India over the past few weeks for the majority stake acquisition, said three sources with knowledge of the talks.

 - Reuters