Indian Banks and Their Challenges
Essay Preview: Indian Banks and Their Challenges
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oreign banks have been part of Indias financial landscape since late nineteenth century. For the first few decades after independence, they quietly existed as icons of global financial authority, attracting high end clients and employees.
Opening of the economy in the 1990s brought fresh attention to foreign banks for their role in facilitating trade flows, introducing new products and helping capital formation. Many foreign banks expanded and tried to localise products, services and branding, even as new private sector banks offered competition. The latter were able to grow rapidly, aided by an active policy of branch licensing and consolidation.
Over time, the relative disadvantage in terms of branch licensing and inorganic growth opportunities became significant hurdle for foreign banks, particularly those whose business plans went beyond serving their multinational clients in one or two locations.
RBI roadmap
In this backdrop, the roadmap for foreign banks released by Reserve Bank of India in 2005 was an important pointer to the policy direction for foreign banks; moderating hopes of rapid expansion on one hand and creating long-term optimism on the other.
The roadmap termed its goals as consolidation of domestic banks and synchronised presence of foreign banks, vaguely promising a wider play during the second phase. But before the first phase of the roadmap expired in 2009, the world as we knew it came to an end, ending with it all certainty of economic relationships.
In the wake of the financial crisis, another noteworthy demise was that of the assumption that the developed world knew all along what it was doing. Also, Indian banks fared well through the crisis. All of this damaged the foundation on which the promise of change was built; thereby delaying the second phase and denying the big opportunity that many were watching out for.
And then, RBI released a Discussion paper on the presence of foreign banks in India in early 2011. Apart from a more assured point of view regarding local incorporation for systemically important foreign banks, the Discussion paper does little to shake up the game for existing foreign banks. It does, however, change the rules of entry for new entrants by defining categories of banks that may not be eligible for the branch mode of presence.
Interestingly, 2009 and 2010 recorded the highest number of branch licences given by the RBI in recent years. Many of these went to new entrants from hitherto under-represented geographies of South East Asia, Australia, Japan and Korea.
It is worth examining the landscape for foreign banks in India as a result of the realignment of global economies and population trends. It is also useful to contextualise this within the rise and interconnectivity of the emerging markets that seems to be here to stay and shape the future of financial services globally.
The theory of shift of economic power to emerging markets is now widely accepted. WTO data show increasing trend of interregional trade flows between countries in Asia, West Asia, Africa and South and Central America.
Indias top two trading partners are GCC and China. While Europe and the US grapple with economic and regulatory changes that make incremental capital infusion in India difficult, Indian regulations proposed in the discussion paper target these banks for local incorporation, further exacerbating capital issues. This is already playing