Global financial firms may be making small investments and growing organically in the country, but they are hoping to gain a larger piece of the action when foreign ownership limits are reviewed in 2009. From banks and brokers to insurers, fund managers and exchange operators, foreign firms want some of the business that boosted the Indian profits of banks like Citigroup and Standard Chartered by between 18% and 30% in 2005-06.
“Our constraint is that we don’t have enough branches,” said Sanjay Nayar, India chief executive officer at Citigroup, which, like other foreign banks in the country, can only open a handful of branches each year.
“We look forward to opening more branches as and when we receive licences, and increasing our presence in not just the big cities, but also in semi-urban areas where we currently do not have banking presence,” he added.
Foreign banks are looking with a keen eye towards 2009, when the Indian government is expected to review rules that limit foreigners to holding less than 5% in domestic lenders.
To tap growth in consumer finance for now, Citigroup and rival foreign lenders such as HSBC and Standard Chartered Plc have set up finance companies to get around central bank restrictions on opening new branches.
Elsewhere in the financial sector, foreign companies are forming joint ventures, buying minority stakes, or, where they can, going it alone to broaden their exposure to the country’s 9% economic growth.
This month, French lender BNP Paribas extended its alliance with Geojit Financial Services Ltd to institutional brokerage and raised its stake in the firm to as much as 34%.
And number two US life insurer Prudential Financial Inc. plans to form an Indian life insurance joint venture with leading real estate firm DLF, becoming the latest in a string of overseas players entering the life insurance sector, where foreign ownership is capped at 26%.
Foreign banks are expected to boost their holdings in domestic lenders if allowed to, after 2009, but industry players said rapid liberalization was unlikely in a market where 40% of the adult population does not have access to banks.
“I think it will be a gradual opening—it won’t be a big bang,” said Romesh Sobti, country executive at Dutch bank ABN Amro, which will open its 28th branch in India this year.
But as Asia’s fourth largest economy expands, companies and individuals will demand better financial services, which analysts say may hasten liberalization in the sector.
Indian firms have been on a global acquisition spree, led by Tata Steel, Hindalco and drug makers Ranbaxy Laboratories and Dr Reddy’s Laboratories.
Individuals, meanwhile, are snapping up financial services products.
“As Indian companies become global, they will need more sophisticated services,” said Sanjay Aggarwal, head of financial services at KPMG in Mumbai.
Opposition from political parties could curtail reforms in the industry. Two years ago, the government said it would raise limits on foreign holdings in insurance firms to 49% from 26%. Communist allies of the ruling United Progressive Alliance have so far blocked the move.
Adding to uncertainties about the review on limits of foreign banks in 2009, parliamentary elections are due that year. The central bank will also have a new head by then.
“Liberalization is definitely bound to happen, but the pace will depend on demand for sophisticated services combined with the political climate,” Aggarwal said.
Despite the hurdles, the sector offers huge potential.
India’s most valuable bank, ICICI Bank, has a market value of $17.8 billion (Rs 76,540 crore). By comparison, China’s big banks rank among the world’s largest by market value, with Industrial and Commercial Bank of China worth $213.7 billion.
Giuseppe De Giosa, chief representative for South Asia at the fifth largest Italian bank Banca Monte dei Paschi di Siena , said the bank was closely watching developments and opportunities in India, which he likened to China in the 1980s.