Are foreign banks interested in the 1 Rupee loan?

Now that the dust from the Indian election has settled and portfolios have been allocated, with the Finance Minister going to Pranab Mukherjee, the question on everyone’s mind concerns whether we’re actually going to see reforms in various industry sectors. In particular, the one that interests me is the financial services industry.

In her joint address of the Indian Parliament last Thursday, President Pratibha Patil spoke of (a) the need to create a new pensions regulator, (b) easing foreign direct investment for international banks, and (c) the disinvestment of various public sector undertakings.

Whilst some of the largest international banks and insurance companies are already there, will the existing stakeholders – including the Indian banking fraternity allow this to happen? Lack of progress, only, holds back plans to make Mumbai an international centre for financial services.

It may be true that British insurers like Aviva, the Pru, Standard Life, Royal & Sun Alliance, and Legal and General have successful partnerships with Indian firms like Dabur, ICICI etc, but they’re held back from further expansion mainly as a result of the 26% cap on foreign ownership. Mr. Chidambaram, former Finance Minister, even commented that insurance penetration in India as being “pathetically low”. And that India must “move along with the rest of the world”.

With critical reforms not taking place, the insurance markets are dominated by inefficiency; stifling innovation and competition; and limiting expansion of life and health insurance to rural areas.

In the banking sector too, foreign banks have earned a good reputation . HSBC, Barclays, Standard Chartered all have a significant presence in India but the expansion of these and other international players is held back by high capital requirements, equity caps on foreign ownerships, restrictive limitations on new branch licenses, and burdensome licensing procedures.

With a population in excess of 1 billion, India allows only 12 new banking licences per year!

Indeed the need for further reform of the Indian banking sector is highlighted by the fact that only ten of the 27 publicly owned banks are fully computerised!

Whilst HMG will continue to push for change, I believe that the Indian financial services community also stands to benefit from reforms and should push for it.

Not so long ago, KV Kamath, ICICI Bank’s Chairman made a point to me that made me think. He argued that the Indian banking environment and opportunity is limited for international banks for the reason that he didn’t believe that a HSBC would be interested in providing a 1 Rupee Loan to a villager living in the remotest part of India.

In defence of globalisation, wouldn’t it be great if the option existed? They may not want to participate in the growing micro-finance opportunity, but surely that’s a commercial decision for them.

Is a Congress Party win good for global commerce?

Now that we know that the Congress have won the general election with a comfortable margin, which allows them to be that little bit more confident in their agenda setting, the question that I’ve been most asked is whether a Congress victory is good for the international business.

If what a business leader most wants is stability, then I believe that the people have delivered a much more stable government than the last, which was run on the whim of the Communist Comrades of West Bengal.

We must also take some comfort in the fact that senior Ministers like Chidambaram and Kamal Nath have made statements that recognise that the reforms process must move forward – whether this is to do with labour reform or increasing FDI in various industry sectors. The latter is what I’d like to examine further.

Its proven that in sectors such as IT, biotech or telecom – which are ‘open’ to foreign equity and participation, we’ve seen huge growth – some commentators estimate around 40% growth year on year. Whereas in ‘closed’ sectors such as retail, legal services or accountancy, you’ve only seen single digit growth. The argument being that the more ‘open’ India becomes, the greater the chances of her becoming more competitive and successful.

Chidambaram has commented on the inadequate level of life insurance cover in India as being “totally pathetic”, and also often stated the need to bring reforms to the banking sector, does this mean that we should expect the reforms required to ensure that the Indian consumer gets more value for their money?

Well, without the Communists holding a gun to their heads, it seems that the Congress Party has a range of options to pursue to take the globalisation agenda forward. The international community expects it, and to be honest, I’m not sure the Indian Government will have any plausible excuses to defer critical economic reforms or on delivering on Doha much longer.

Economic Reform Wish List

With the Communists jettisoned from the UPA, I hope that the limited time that the Congress have in this parliament is used to bring in legislation / initiatives that will make a huge difference to India truly becoming a global player. If anything, Indian people stand to benefit the most from these policy changes.

My wish list is as follows:

1. FDI for multi brand retailing – foreign investment into the retail sector can only be a good thing and will serve as an engine for employment.

2. Civil Aviation – allow foreign equity participation in domestic airlines, allow airlines to small airports, and create cargo hubs to assist exports.

3. Foreign Education Providers Bill – let foreign universities tie up and invest in setting up campuses in India. The country may  be producing huge numbers of graduates, but this would create extra capacity and improve research capabilities.

4. Insurance Sector – let foreign investors invest upto 49%. The extra 23% jump will serve as a catalyst and enable more access of capital for the insurance sector.

Like I said, the UPA has a limited timeframe. Their general election is due in the first half of next year. Everyone knows that Manmohan Singh initiated the reform process in the early 90’s, he can leave a huge legacy if he delivers on substantive initiatives before the country goes to the polls.

The future of economic reforms in India

Ever since the UPA came into office, they’ve blamed their inability to make progress on various fronts, down to their need to respect ‘coalition dharma’. Take economics and market liberalisation as an example, many influential people including a few Union Ministers have spoken of how the Communists held them back and blocked the reform agenda every step of the way.

Given that the Comrades from West Bengal have shot themselves in the foot by failing to topple the UPA as a result of their withdrawal, it would be fair to assume that all roadblocks (excuses) to market liberalisation have been cleared. No?

Knowing India, I’m sure the answer isn’t that straight forward. Yes, there are some pretty entrenched views on liberalisation in various elite circles in India, but when you go speak to the average joe bloggs, they’d welcome better quality, innovative services and lower prices, and for this reason, I believe that the UPA should go out there and make the case for reform more convincingly.

With electoral fortunes looking bleak for the UPA, what have they got to lose?