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.

Foreign Direct Investment in India

The Reserve Bank of India, this week, said that the total amount of FDI in India in the first quarter of this financial year exceeded the TOTAL received in 2005/06, which amounts to $10bn (£5.4bn).

Of the $10bn, a little bit more than $2.2bn was a result of the purchasing of shares by foreign companies in Indian businesses, which shouldn’t come as a surprise with the likes of Tesco and Vodafone showing an interest in India.

There’s an ongoing debate as to whether India can catch up with China, after all the latter nets upto $50bh on average every year. If India continues the explosive growth that these figures show, then there’s no reason why it shouldn’t match China. After all, India has over the past few years accrued the following sums:

2005/06 – $10bn

2006/07 – $22bn

2007/08 – $32bn

If the first quarter trend continues, then India is likely to meet, and possibly break, the RBI’s FDI target of $35bn for 2009.

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.