Why Global Banks Are Banking on India

Foreign Banks like HSBC, Bank of America, Standard Chartered Bank and Deutsche Bank etc are coming to India and they are trying to grow. This grwoth can be both organic growth, and alsothese banks are expanding in India by buying stakes in private banks and setting up non-bank finance companies.

Why is this happening. There are various reasons to this. These are highlighted below.

1) India is viewed as one of the biggest growth stories among emerging markets

• Real GDP growth for last four years (FY04 to FY07) averaged 8.6% and growth rates during the last two years above 9.0%.
• Acceleration in Gross Domestic Investment rate from 24.3% in FY01 to 33.8% in FY06.
• Average non-food credit growth of the banking sector for last three years (FY05 to FY07) was robust at 29.3% and is expected to be around 25% in FY08.
• Infrastructure, SMEs, farm credit and retail sectors have primarily been powering the growth of bank credit in India.

2) Estimated demand for funds from the infrastructure sector is quite huge.

• Gross Capital Formation in infrastructure sector for 11th Plan period (FY07 to FY12) is estimated at $569 billion.
• Credit flows of banks to infrastructure sector are expected to grow at the CAGR of 25% till FY12 (Source: IDFC)

3) Retail credit too has been growing in robust fashion at about 22% and bankers expect similar growth rates to sustain over next 5 to 10 yrs.

• Buoyant economic growth & “wealth effect” of surging capital markets are the major triggers for growth in consumer loans.
• The number of millionaires in India has crossed the 1,00,000- mark and salaries in India have witnessed 13% to 14% growth – higher than that seen in China & SE Asian countries.
• Cars, white goods, computers & entertainment electronics have become much more affordable with the Government steadily lowering tariff level on both the domestic/imported goods.
• Ever increasing demand, rising income levels, fiscal concessions, probability of low default due to social importance of a house & comfortable liquidity in the banking system have created huge potential for housing finance business.

4) Expanding market for SME finance (expected CAGR for next 4-5 years at 30.0%).

• Growth of the SME sector in last eight years (average of 8.0%) has been more than that of the industrial sector (average of 5.0%).
• India has approximately 400 modern small scale and 2,000 rural & artisan based clusters, which contribute around 60% of India’s manufactured exports.
• SMEs are enjoying increasing support from government in terms of credit & finance, technology, business development, infrastructure & other areas.
• Many of today’s corporates had their origins in smaller enterprises, which were able to expand in line with emerging opportunities.
• There are no policy restrictions on FDI in small units, except if they are in the reserved category.

5) Enormous opportunities for lending to rural economy,

• Especially to “new agriculture” of high-value products such as fruits, vegetables, dairy and meat products, for which both domestic and export demand are very high.
• Rural markets are expanding at a faster pace. A recent Survey shows that 53% of FMCG sales and 59% of Consumer Durables sales take place in rural areas.
• Of the 2 million mobile connections, 50% went to small towns & villages.

6) Newer areas like insurance, mutual fund distribution, credit cards, leasing, asset management, advisory services, wealth management, etc. have created opportunities to diversify the revenue streams and enhance non-fund based income.

7) Foreign banks operating in India are increasingly financing global aspirations of Indian corporates & help them raise funds (debt or equity) or finance their acquisition plans.

• For instance, Citibank has reportedly helped in financing up to $15 billion of acquisitions by Indian corporates overseas.

8) Banks are also seeing increased action in transaction based businesses such as bill discounting in India.

9)Bankable household in India is anticipated to grow at CAGR of 28.1% during 2007-2011.

10) Size or lack of it remains the “key” to banks’ growth aspirations in India.

• The “announcement” of a roadmap of banking reforms spurred a series of investments by foreign banks into India.

Well these are just a few reasons according to me supported by some data why baks are eyeing India, but ther could be some more, so make sure to contribute them from your side to make this a better reading experience.