Banking consolidation gathers pace in India

Capital requirements and the freeing up of foreign participation will quickly see the number of banks in India reduced by a third.
The room was packed when a panel of speakers convened to review IndiaÆs future as a global market at Sibos on Tuesday. The panel of four experts discussed IndiaÆs economic growth trajectory, its role as a services hub, the availability of qualified workers, and ultimately, the ongoing consolidation of the banking sector.

While the general feeling was positive, the expert speakers warned that the opportunities presented to local and foreign businesses in India come with some caveats. The government seems confident that it can maintain a GDP growth rate of around 8%, but the economy has its soft points, namely the rising current account deficit, an imbalance in trade, and poor productivity in many industries.

Philippe Metoudi, director of relationship management for Cleastream Banking in the region, says India has received a lot of positive press in recent years, but cautioned attendees against being too upbeat. ôWhile I am generally positive about the countryÆs future, I sometimes wonder whether the economic tiger is actually a cat,ö says Metoudi. ôTax collection is difficult in a country that is so vast and spread-out, so the budget deficit is only likely to increase in coming years. Interest rates might be on the rise and IÆm not convinced that the much-lauded services industry will help to improve the trade deficit.ö

Framroze Pochara, CEO of the Dubai Gold and Commodities Exchange and former head of operations at India's national stock exchange, added his thoughts by saying the country hasnÆt yet reached its orbit. Pochara says India has achieved great things in recent years such as increasing its level of foreign exchange reserves, introducing a new real-time gross settlement system, and dematerialising its stock market in record time. ôBut India needs massive investment in new infrastructure projects and a lot of this investment must come from overseas," he says. "The current environment makes it difficult for foreign investors to inject money into the country and the government needs to address this.ö

The freeing up of IndiaÆs markets then became the focus of the discussion. ôIndia is liberalising but every now and then it hits internal political roadblocks,ö says Radah Binod Barman, executive director of the Reserve Bank of India. ôIt is important that any new legislation doesnÆt encourage the flow of risk capital into the country. India survived the Asian financial crisis of the late-90s because it had not attracted the same hot money that was present in Southeast Asian countries. So new foreign investments must provide stability and not cause shocks in the market.ö

One of the sectors earmarked for further foreign participation is the banking sector, with new rules governing this industry due to be introduced in 2009. The new laws will make it possible for foreign banks to buy domestic banks, says HN Sinor, chief executive of the Indian BanksÆ Association. ôThis will lead to consolidation,ö says Sinor. ôWe have far too many players in the banking system at the moment. There are 27 public sector banks that control 80% of market share and 28-odd private sector banks that control the other 20%. I see a situation where there will be a total of eight to 10 public sector banks left in three to five yearÆs time, and the same number of private sector banks too.ö

Metoudi says the ability to buy domestic banks will give foreign banks access to more physical branches, but he refutes claims that foreign banks are doing it tough in the current more restrictive environment. ôForeign banks may only have a 7% market share in India, but this is the same market share that foreign banks in Germany and the US enjoy, so India isnÆt any different to more developed markets in this respect. Foreign banks have had a good ride in India. On average they achieve a return on assets of around 3% which is much better than the 1% ROA achieved in Hong Kong or Singapore.ö He says this solid performance comes from controlling the foreign exchange and government bond markets. ôThese are two very profitable businesses.Æ

Barman says the greater driver for consolidation will be the need for Indian banks to meet capital adequacy requirements laid out in Basel II.
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