In January this year, Swiss financial services giant Credit Suisse acted as investment banker for a deal in which Japan's NTT Communications bought a majority stake in Mumbai-based data centre service provider Netmagic Solutions for Rs 640 crore. Credit Suisse, however, earned more than what it usually does from such deals in India.
"This was because we provided a range of other banking services too, including foreign exchange solutions," says Mihir Doshi, CEO, Credit Suisse India.
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Had the bank not set up its first India branch in Mumbai last year, and started commercial banking operations, he would not have been able to do so. "Having a bank branch levelled the playing field," he adds.
It is just not Credit Suisse that has, of late, seen merit in launching commercial banking in India. As many as 10 foreign banks from countries as diverse as Australia, China, South Africa, South Korea, Switzerland and Russia have entered India in the last three years.
Foreign banks now constitute the largest segment of scheduled commercial banks in the country. According to Reserve Bank of India data, there are 41 foreign banks, 26 state-run lenders and 20 private-sector banks in the country.
So what explains this rush to enter India? "The Indian banking sector is well regulated and offers considerable access to foreign banks," says Kalpana Morparia
, India CEO of J.P. Morgan. Foreign banks hope that India will open up its banking sector even further.
Shinjini Kumar, Director for tax and regulatory services at audit firm PricewaterhouseCoopers, says hopes of further liberalisation as well as the opportunities arising from India's growing economy are luring foreign banks.
Adds Sanjiv Bhasin
, the India CEO at the Singapore-based DBS Bank: "If the Indian economy grows at five per cent, the financial services sector will typically grow three times faster, at about 15 per cent."
Foreign banks are also looking to tap into the opportunities arising from greater trade flows. Take the case of the Toronto-based Bank of Nova Scotia, which has five branches in the country. Its India CEO Sanjeev Mittal
says trade between India and Canada is set to triple to C$15 billion (Rs 82,500 crore) in three years. "As Canada's most international bank we are well positioned to take advantage of this growth," he says.
The latest opportunity foreign banks see is in the retail sector. The government recently allowed overseas companies in multi-brand retail and removed the cap on foreign direct investment (FDI) in single-brand retail. J.P. Morgan's Morparia says this will provide more opportunities to foreign banks once investment in retail gathers the required traction.
Foreign banks are also preparing for the internationalisation of Indian business. "As Indian companies go global they need banking support and it is not possible for Indian banks to be present all over the world. Foreign banks have the network," says Morparia.
Mahendran Moodley, the India CEO of South Africa's FirstRand Bank, the first African lender to start operations here, offers a similar argument. " Our rationale for entering India is to offer the African value proposition to Indian companies interested in Africa," he says.
These banks see a larger role for themselves in the future. Kaku Nakhate, President and India head at Bank of America, says a growing local economy will require a massive amount of capital and state-run banks alone will not be able to meet that demand. Foreign banks will then be well placed to bridge this gap.
India is a profitable market as well for foreign lenders. The country is the fifth most profitable market for Deutsche Bank globally and its most profitable emerging market. "If you really want to monetise the market opportunity in India you need to embrace it unconditionally," says Ravneet Gill
, CEO, Deutsche Bank India. "You have to come in with a big-bang investment."
But India's attraction also comes with a set of challenges. Banking is still licensed and so is branch expansion. Foreign banks are not allowed to acquire local banks. This explains why, despite decades of presence, they account for just 323 branches of the total 81,240 bank branches in the country and a share in advances and deposits of barely five per cent.
"We have the capability to become a large retail bank. For that we need a partner or we should acquire an existing bank," says Moodley. The new priority-sector norms issued in July are also discomforting. Foreign banks with more than 20 branches will now have to give 40 per cent of their loans to priority sectors such as agriculture. The current limit is 32 per cent. The limit for banks with less than 20 branches remains 32 per cent. "This is the conundrum we foreign banks face," says Moodley. "Should we cross the tipping point of 20 branches?"
Still, for most foreign banks the opportunities far outweigh these difficulties. Deutsche Bank's Gill puts it best: "We don't see any challenge that we presently face in India as a showstopper."