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Thursday, Jun 14, 2007
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Financial Policy Money & Banking - Foreign Banks Financial globalisation gathers momentum T.B. Kapali
Chennai June 13 The Reserve Bank of India's road map for foreign banks envisages an increased role for them — in terms of their taking stakes in Indian entities or even being allowed to acquire Indian banks — from 2009 onwards. The RBI, in its road map released in 2005, laid out a graduated scaling up of foreign bank activity in order to enable Indian banks to better prepare themselves for global competition. The RBI did not formulate any specific road map for the non-banking financial services sector as foreign direct investment in this sector was already permitted under the overall FDI policy. Also, given the pre-dominant role of banks in the overall credit markets (banks accounting for around 95 per cent of all outstanding credit), attention was naturally focussed on them. Systemically important non-banking financial companies (NBFCs), though, have come under the regulatory scanner more recently with the RBI formulating updated guidelines on the relationship between banks/such NBFCs.
Watershed year
Half way into the 4-year window offered by the RBI, it appears that 2009 could well be a watershed year in the domestic financial sector as regards the market presence and operations of foreign financial intermediaries. The signals for that are coming from recent developments in the non-banking finance sector. Repco Home Finance Ltd is the latest in the growing list of non-banking finance companies in which overseas financial entities are eyeing stakes/have already acquired stakes in the recent past. This list includes names such as Chola DBS, Sundaram Home Finance, Dandapani Finance, First India Credit (previously known as Fullerton India which itself was a re-named NBFC taken over by Singapore's Temasek Holdings) and Shriram City Union Finance of the Shriram Group. It is not a coincidence that all the NBFCs mentioned above are South-based. That is only a reflection of the fact that NBFC activity, historically, has been more prominent in the South than in other parts of the country. The key questions though are: what is driving this phenomenon of foreign financial intermediaries picking up stakes in Indian financial entities? And, what is it that the foreign investors are positioning themselves for? Also importantly, how will the competitive position of Indian entities be affected by the growing presence of foreign players?
Household credit
Though all the companies mentioned above are either Tier 2 or 3 size-wise, foreign investors have not been deterred by the current scale of operations of these entities. Foreign direct investment in any sector is driven by long-term growth prospects. And if the statistics relating to household credit in India are any indication, foreign investors in Tier 2 or Tier 3 finance companies are basically positioning themselves for a huge expansion of the overall market itself. There will be enough business opportunities for all levels of market players — be they financial conglomerates in the top category or the Tier 2/3 companies. As the accompanying table shows, household credit in India is just around 1/10 of the GDP. Leaving alone the mature markets of the West, even in emerging Asian countries such as Korea, Philippines or Thailand, the ratio is much higher at around a quarter of the countries' GDP. To look at the figures in perspective, on a GDP of around Rs 35,00,000 crore currently, household credit — comprising housing loans, credit cards, consumer durable loans, education loans etc — is around Rs 3,50,000 crore. Housing loans constitute around 50 per cent of this i.e. around Rs 1,75,000 crore. Total credit is around 50 per cent of GDP — about Rs 18,00,000 crore.
Biz avenues
One can visualise the business opportunities here with GDP growing at around 8 per cent and more financial deepening resulting in an increase of the share of overall credit (and household credit) in the national output. Foreign investors are basically betting on the pie getting bigger and bigger. They are positioning themselves strategically for the expected explosion in private sector credit in India and that too in segments which are relatively higher margin businesses.
Broader implications
Significant implications await the domestic financial markets on the back of the above developments. For one, newer financing techniques such as securitisation of mortgages — not so far tried that much in India but well known in the advanced markets — could gain ground. This is all the more relevant given the RBI's cap on banks' exposures to non-banking finance companies. The domestic corporate bond markets could get a boost in the process. Risk management in the financial sector may also assume a higher and more rigorous profile enabling lending institutions to offer products which may better match demand. From the regulator's point of view, the deeper penetration of the Indian financial sector by foreign entities could throw up its own supervisory and monetary policy challenges. Indian banks may have to reckon with newer dimensions of competition as foreign players create niches on both the lending and funding sides.
More Stories on : Financial Policy | Foreign Banks | RBI & Other Central Banks | NBFCs
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