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India, Singapore open financial turf to bolster trade

India, Singapore open financial turf to bolster trade
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First Published: Thu, Apr 17 2008. 01 36 AM IST

(Illustration by: Malay Karmakar / Mint)
(Illustration by: Malay Karmakar / Mint)
Updated: Thu, Apr 17 2008. 01 36 AM IST
Mumbai: Since August 2005, when the Indo-Singapore Comprehensive Economic Cooperation Agreement (Ceca) came into effect, trade between the two countries has been rising by 20% every year. Indian companies now account for the third largest overseas group in Singapore with 3,084 firms setting up shop in the city-state. However, the financial sector is one area where both Singapore and India found it difficult to move ahead.
(Illustration by: Malay Karmakar / Mint)
The ice has finally melted. The Reserve Bank of India (RBI) and the Monetary Authority of Singapore (MAS) last week opened up the financial turf of their respective countries. DBS Bank Ltd, the largest bank in Singapore in terms of assets, has got the Indian central bank’s nod to open eight new branches across India. RBI has also issued a licence to Singapore’s United Overseas Bank Ltd (UOB) to open a branch in India, making it the second bank from the city-state to have a presence here.
MAS, on its part, has offered the qualifying full bank (QFB) status to State Bank of India (SBI). India’s largest lender will now be able to raise retail deposits and open 25 centres in Singapore, including automated teller machines (ATMs) and point-of-sales operations. SBI, which entered Singapore in 1977, has one branch but no access to retail deposits.
Over the past two years, two Indian banks—Bank of Baroda (BoB) and Axis Bank Ltd— have been allowed to set up operations in Singapore. DBS, the largest bank in Singapore, was granted one more branch licence in India, taking its branch network to two, just before the two countries signed the treaty. Beyond this, neither RBI nor MAS was willing to open up the financial sector of their respective countries even though both governments had promised to do so.
The hitches
Under the treaty, RBI was to allow three Singapore banks to open 15 branches in India and MAS was to give QFB status to three Indian banks. A QFB can raise retail deposits and operate at 25 centres across Singapore, including both brick-and-mortar branches and ATMs. However, no Indian bank was allotted QFB status since August 2005 as MAS was insisting on Indian banks meeting certain criteria as a precondition for this, even though the treaty did not stipulate this.
MAS was, in fact, ready to offer up to three QFB licences to Indian banks, provided they met its “prudential requirements”; it believed that the treaty did not ensure an automatic entry for Indian banks. The insistence on ratings and prudential norms, MAS had earlier said, was in conformity with World Trade Organization (WTO) norms and other free trade agreements.
RBI too was not too willing to allow Singapore banks to increase their presence in India. DBS has been keen to open many more branches in India, but the local regulator has never been encouraging on that front. Two other Singapore banks—UOB and OCBC Bank—were also to be allowed entry under the treaty.
MAS had indeed issued banking licences to BoB and Axis Bank, but neither of them can take up full-fledged banking activities there as they were given licences to open offshore branches.
Singapore has 113 commercial banks, of which only six are local banks. But unlike foreign banks operating in India, overseas banking entities in Singapore cannot undertake all banking activities. There are only six QFBs—Citibank NA, Hongkong and Shanghai Banking Corp. Ltd, BNP Paribas, ABN Amro Bank, Standard Chartered Bank and Malayan Banking Bhd. Besides, there are 24 full banks, 42 wholesale banks and 41 offshore banks.
Among Indian banks, Uco Bank, Bank of India, Indian Overseas Bank and Indian Bank are full banks, while SBI, ICICI Bank Ltd and BoB are offshore banks. Full banks offer the whole range of banking services, but barring Uco (which has two branches) all other banks have a one-branch presence. In contrast, a QFB can operate from 25 locations.
The flashpoint
The impasse reached a flashpoint when RBI disallowed Temasek Holding Pte from raising its stake in ICICI Bank. Ownership norms in private banks in India does not allow any single entity to hold more than 10% in any private bank. But since both Temasek and the Government of Singapore Investment Corp. (GIC) are owned by the Singapore government, RBI preferred to treat them as a single entity and did not allow their combined stake to exceed 10%. This was despite the Singapore government’s insistence that the two are two separate investment vehicles and do not act in concert. This was one of many differences of opinion that cropped up between the two regulators since the signing of Ceca. The government had to intervene and RBI allowed Temasek and GIC to raise their holdings in ICICI Bank as a special case. Incidentally, Temasek also owns 25.8% of DBS.
New relationship
Perhaps it was the RBI nod for Temasek and GIC to raise their holdings in ICICI Bank that marked the beginning of the new relationship between the two regulators. Over the past one year, both RBI and MAS have worked in close cooperation to make things work.
Going beyond banks, the deal between the two will play a larger role in supporting the trade and industry of both the countries even as more and more Indian firms are looking for acquisitions in South-East Asia and Singapore too is keen to play a key role in roads, ports and special economic zones across India.
Interestingly, trade relations between the two countries have improved dramatically despite the two regulators not seeing eye to eye on most issues. Between 2003 and 2005, before the treaty was signed, bilateral trade between India and Singapore had doubled. Total bilateral trade in 2007 stood at Singapore $23.9 billion (about Rs69,000 crore today), more than tripling from S$6.8 billion in 2002. India is now Singapore’s 11th largest trading partner.
India’s exports to Singapore more than doubled between 2003 and 2005, rising from US$1.4 billion in 2003 (more than Rs5,600 crore today) to US$3.6 billion in 2005. Overall, Singapore was the third largest investor in India in 2005, behind Mauritius and the US. Between 2000 and 2007, Singapore was India’s fourth largest investor with US$2.26 billion of cumulative investments.
The beneficiaries
The troika of DBS, UOB and SBI are the first set of beneficiaries of the treaty, but once the regulators move forward at least two more Indian banks will get the nod for a larger play in the island nation and one more Singapore bank will set up shop in India.
Singapore, an important financial hub for South-East Asia, is a strategic money centre on the lines of London, Frankfurt, New York and Tokyo. It will play an important role for Indian entities when the country opts for full convertibility of its currency.
DBS will have its eight branches across the country— Bangalore, Chennai, Kolkata, Moradabad (Uttar Pradesh), Nashik (Maharashtra), Pune, Salem (Tamil Nadu) and Surat (Gujarat). Only three branches are in metros but it is not complaining, as most new branch licences given to foreign banks in India are in non-metros and the banks see huge business opportunity there. Through October, the last period for which confirmed data is available, 29 foreign banks from 19 countries were running 273 branches across India.
Under WTO norms, the Indian banking regulator has to offer 12 new licences every year to all foreign banks but RBI has been liberal when it comes to branch licensing. For instance, between July 2006 and June 2007, the Indian central bank allowed seven foreign banks that have already been operating in India to open 20 new branches and an additional seven to enter India by setting up representative offices.
DBS, which has the largest retail network in Singapore with 83 branches and some 880 ATMs handling at least 50% of all ATM transactions in Singapore, entered India in 1994 by setting up a representative office in Mumbai. This was converted into a branch in 1995. Ten years later it opened its second branch in New Delhi, and also acquired a controlling stake in Cholamandalam Investment and Finance Co. Ltd, a financial services firm with interests in consumer finance, asset management and securities.
UOB, Singapore’s second largest lender, provides a range of financial services through its global network of 524 branches, offices and subsidiaries in 18 countries and territories in Asia-Pacific, western Europe and North America.
It has banking subsidiaries in Singapore, Malaysia, Indonesia, Thailand and the Philippines.
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First Published: Thu, Apr 17 2008. 01 36 AM IST