UPDATE 3-India banking strike clouds financial reform hopes
* State Bank of India halts trading in onshore spot forex markets
* Parliament likely to approve some banking rule changes on Thursday
* Two-day strike shuts most public sector banks across the country
* Rule changes would allow central bank to issue more licences (Updates likely timing of parliamentary approval in paragraph 4)
By Suvashree Dey Choudhury and Manoj Kumar
MUMBAI/NEW DELHI, Aug 22 (Reuters) - Bank transactions and some market operations were hit in India after about one million bank employees began a two-day strike on Wednesday to protest against reforms that will give investors more clout in the tightly controlled sector.
The strike involving mainly staff of state-run banks, who make up around 70 percent of employees in the sector, underscored the opposition to investor-friendly financial reforms that have been pending for years.
Foreign ownership of Indian public sector banks is capped at 20 percent, and some global banks have been pitching for a hike in their holding limit to expand their presence in Asia's third-largest economy by acquiring smaller regional banks.
In what is being seen by analysts as a positive step towards reform, parliament is likely in coming days to approve amendments to banking laws that include raising the limit on shareholders' voting rights in public and private banks.
"Any move towards increasing the private sector role in the banking sector is a big fear for the unions and that makes them oppose it," said D.H. Pai Panandiker, head of the New Delhi-based RPG Foundation think tank.
"The changes in the banking laws can improve the health of the banks quite considerably," he said. "The unions fear if the government continues with the reforms their positions will weaken and it will lead to job losses."
India has struggled to reform and liberalise key sectors such as banking, retail and insurance, partly because of political opposition and fears of the exploitation of domestic interests by foreign investors.
VOTING RIGHTS CAP
The strike, which forced No. 1 lender State Bank of India (SBI) to halt trading in onshore spot foreign exchange markets, comes as another blow to an economy facing its worst slowdown in almost a decade.
If parliament approves the changes on Thursday, the limit on the voting rights of shareholders in private sector banks will be raised to 26 percent from 10 percent now, and to 10 percent for state-run banks from just 1 percent.
The move would give overseas as well as Indian financial institutions and fund managers more say on the functioning of the banks and help improve operations and transparency, analysts said.
"From the market point of view, it is good because FIIs will have a lot more say," said Jagannadham Thunuguntla, equity head at Delhi-based brokerage SMC Capital, referring to foreign institutional investors (FIIs). "Probably, we may expect more FIIs buying in the banking sector."
The proposed changes to banking regulations would also help the central bank issue more banking licences, which would boost the prospects of many Indian and foreign firms who are looking to tap the country's under-penetrated financial sector.
While the changes will meet a key demand of foreign investors, they are unlikely to trigger fresh private investment, largely because the 20 percent cap on foreign ownership in public sector banks will not change.
TRADING HIT, BRANCHES SHUTTERED
The United Forum of Bank Unions, which heads all nine bank employees and officers unions, said the strike had been called to oppose reforms that could ease mergers rules and allow more private capital into the sector.
It was not immediately possible to assess the financial losses due to the strike, though trading volumes in government bonds were thin at 23.6 billion rupees ($425 million) as against the average 40-50 billion rupees in the first hour of trade.
SBI halted trading in onshore spot foreign exchange markets as its settlement operations' staff did not show up for work, sources said.
Bank branches were shut in many cities were shut as thousands of employees, many brandishing banners, shouted slogans against the proposed reforms.
"Unless the government relents or the government gives some positive response, we are going to intensify our agitation," said J.P. Sharma, vice president of the All India Bank Employees Association.
Many public sector banks in Connaught Place, the commercial hub of the capital, New Delhi, saw only two or three employees trickle in for work early on Wednesday, while many joined their colleagues outside the branches.
"Both sides suffer. The public is inconvenienced and we also lose our daily clients," said Shashi Sharma, chief manager of state-run Punjab National Bank as he sat in a dimly lit and vacant office. ($1 = 55.5 Indian rupees) (Additional reporting by Swati Bhat, Archana Narayanan and Neha Dasgupta in MUMBAI and by Annie Banerji and David Lalmalsawma in NEW DELHI; Writing by Sumeet Chatterjee; Editing by John Chalmers and Alex Richardson)