Why Invest in India - Banking

Banking sector is the best performing sector in Indian economy today. With the economy growing at 8.6%, the need for banking services is growing at 34% - no wonder many foreign banks are eager to expand in India. Few days ago I had written about stock investments in two leading banks in India: ICICI Bank & HDFC Bank. The performance of these banks can be taken as indicators of the growth opportunity that exists for banks in India.

Global Banking Giants have got a Foot hold

India liberalized banking sector in 1990’s - albeit in a limited way. Foreign banks still have to follow a myriad set of rules and regulations to establish in India. But this has not prevented Citi Bank, HSBC, ABM Amro, Standard Chartered from setting up retail banking operations in India - Citi & HSBC banks are way ahead in setting up retail operations in India when compared to other foreign banks.

Time is ripe for Global Banking giants

Retail banking in India is dominated by State owned banks - SBI group, Canara Bank, Punjab National Bank and a whole lot of other banks. These banks are lack the entrepreneurial sprit - and are very conservative in their operations.

As a result consumer loans constitute only 8% of total bank lending in India, compared with 36% in Taiwan and 58% in South Korea, according to Enam Securities in Bombay. Mortgages, meanwhile, form a mere 2% of gross domestic product in India, compared with 17% in Malaysia and 51% in the U.S. (Source: Wall Street Journal 2006)

Another result of such conservative banking: most Indian companies do not use bank credit as a means of financing.

This has created an ideal situation for global banks to setup operations and rapidly gain market share by serving the customers - who are unserved by the public sector banks: Consumers, Rural/Agriculture, entrepreneurs etc.

Another very good reason for foreign banks to come to India is Economics of Scope. Major customers of these banks abroad have setup operations in India. MNCs such as GM, Ford, Volkswagen, Daimler-Chrysler, IBM, SUN, HP, Cisco, Intel, Microsoft, BASF, AOL-TimeWarner, GE and several others need banking services in India and they are now forced to use local banks or other banks rather than their main banks at home. Global banks need to expand in India to serve their long standing corporate customers in India.
The opportunities in India are immense: starting from corporate banking, SME, Retail banking, consumer finance, and micro finance. Currently, most foreign banks are concentrating on corporate banking only - but the real opportunity is in retail banking and consumer finance.

Giants Waiting to Expand

Indian growth story is not lost on the global banking giants - particularly European banks. Led by HSBC and Standard Chartered, European banking giants are eager to make a big splash in 2007. Deutsche Bank, Barclays, ABN Amro, BNP Paribas and Societe Generale have announced big investment plans and budgets for 2007.

Macquarie Bank from Australia, Development Bank of Singapore, Citi Bank, and Bank of America have also announced major expansions in 2007. In total 37 foreign banks are currently operating in India with 217 branches ( most banks are operating in a very limited way).

Compared to China, Banking sector in India is much more open in India. Foreign banks can enter India through wholly owned subsidiary or via joint venture. In case of a JV, foreign investors can own upto 74% of the equity. India has about 37 foreign banks operating in India already. In China, by comparison has none. Only in December 2006, Chinese government gave permission to nine foreign banks to start operations in mainland China. (HSBC, Standard Chartered, Bank of East Asia, Hang Seng Bank, Mizuho Corporate Bank and Bank of Tokyo-Mitsubishi UFJ, DBS Bank, of Singapore; and ABN Amro)

Closing Thoughts

Banking is one of the essential tools of capitalism. With Indian economy opening up and booming the time is ripe for foreign banks to expand and establish in India. Apart from banks, opportunities are there for non-banking finance operations - such as GE Finance, Citi Finance which are primarily engaged in consumer finance.

European banks have taken India seriously and are planning on massive expansion in the coming years. A notable aspect has been the absence of American banks in India - barring Citi bank, no other major American bank has opened any significant operations in India. Wells Fargo Bank, Bank of Wachovia, Bank One, First Union, etc. are yet to setup operations in India. Similarly Japanese banks are absent in Indian markets. Given the latent demand for banking services in India it is still not late to make a big splash in the coming years.

Also See:

Why Invest in India?
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