The housing finance sector has been growing at 25 to 35 per cent annually, while auto and consumer loans, credit cards and other retail banking segments have been witnessing 20 to 25 per cent growth rates.
The Reserve Bank of India (RBI), the country’s central bank, had squeezed interest rates in recent months, fearing that the economy was over-heating. Banks too were forced to hike their rates, resulting in a slowdown in off-take of loans. But the industry believes this is a temporary blip, and expects resurgent demand.
Last week, top executives of two of the largest banks in the country – government-owned giant State Bank of India (SBI), and private sector behemoth, ICICI Bank – were busy either working out the modalities of a massive fund-raising exercise (in the case of SBI), or (in ICICI’s case) actually raising the money abroad.
India’s banking sector has been on a roll for several years, as demand for financial products has been growing. The sector is attracting several international banks and financial firms, many of who have queued up for licences from the RBI.
International accounting firm PricewaterhouseCoopers last week came out with a report indicating that India could emerge as the third largest banking hub in the world, after China and the US, by 2040.
According to Jairaj Purandare, executive director, PwC, the Chinese banking sector will grow faster than India’s over the next decade, but a rapidly ageing population will slow down growth in China after that.
‘Banking in 2050: How big will the emerging markets get?’ the PwC report, predicts that the banking sector profits in the seven bigger emerging markets (E7 – comprising China, India, Brazil, Russia, Indonesia, Mexico and Turkey) would outstrip those in the seven leading industrial nations (G7 – comprising the US, Japan, Germany, the UK, France, Italy and Canada).
Domestic credit in India is expected to balloon from less than $500 billion about three years ago, to a whopping $23 trillion by 2050, the PwC report projects. A restructuring in the global banking industry is expected to see E7 banks acquire international banks that dominate the sector internationally today.
India’s largest bank, SBI, which has been pummelled by dynamic new private sector entrants (who do not carry the ideological baggage of the past, and are in the business for making money), is yearning to rid itself of government controls.
And the first moves in this direction were initiated a few days ago, when the central government decided to acquire Rs320 million equity shares in SBI from the RBI for over Rs353 billion. The federal government issued an ordinance enabling it to acquire the nearly 60 per cent stake that the central bank has in SBI.
According to O.P. Bhatt, chairman, SBI, the government stake in the bank will be reduced to 51 per cent, once the necessary legislation is passed in a few months. SBI will raise funds from the public by December, and over the next three years, hopes to generate over $12 billion.
Officials at the bank estimate it may need nearly $25 billion over the next five years to ensure continued growth, and to prevent its business from being eaten into by private sector rivals and international banks. SBI, along with other public sector banks, also has to raise funds to meet tough new BIS (Bank for International Settlement) norms relating to capital.
SBI shares are listed on the Indian stock exchanges, and the scrip has gained by 18 per cent this year. Analysts expect stellar performance from SBI, now that the RBI has handed over its share of the bank to the federal government. There are moves to regulate the banking regulator in India, as the government wants it to concentrate on its task of monitoring the rapidly developing sector, and not own banks.
The opening up of the financial services sector in India had seen banks entering the insurance and asset management business. SBI too had set up a life insurance unit – together France’s Cardiff, which has a 26 per cent stake – and an asset management company with Societe Generale.
According to Bhatt, SBI will gradually set up a non banking finance company to take over the insurance and asset management business. It will also offload a 10 per cent stake in the new venture, and may go public in two years.
The nation’s largest bank also has over half a dozen subsidiaries, many of which compete directly with the SBI. But it is uncertain whether SBI will go in for a merger of all the subsidiaries, or spin them off at a later stage. The bank, however, has no immediate plans to acquire other local banks.
While SBI is working out plans to raise funds, its private sector rival, ICICI Bank, has just managed to raise nearly $5 billion through the sale of shares, both in the international and domestic markets.
The bank raised over $4.3 billion and has a green-shoe option to raise another nearly $700 million over the next few days. ICICI managed to raise $2.15 billion through the sale of its American Depository Receipts (ADRs), and also got an equal amount in the domestic market. The domestic offer was oversubscribed by nearly a dozen times.
ICICI Bank’s shares are listed on the New York Stock Exchange, and it was among the first banks in the country to tap the overseas markets for funds. The bank, which came into being after the merger of the Industrial Credit and Investment Corporation of India, a government-owned development finance institution, and its banking subsidiary, broke all previous records for raising funds from the market.
State-owned oil giant ONGC had raised $2.3 billion in 2004, making it the biggest share issue in India. In June 2007, leading real estate developer, DLF of Delhi, managed to attract $2.24 billion for its initial public offering (IPO).
Like SBI, ICICI Bank also wants to spin off its insurance and asset management units into a separate holding company. The bank also wants to raise $650 million by selling off a six per cent stake in the holding company to Goldman Sachs. However, the Foreign Investment Promotion Board (FIPB) last week blocked the move. ICICI Bank has sought a fresh approval, and is confident of getting it.
The country’s largest private sector bank wants to transfer its stake of 74 per cent each in ICICI Prudential Life Insurance and ICICI Lombard General Insurance, and the 51 per cent stake in Prudential ICICI Asset Management and Prudential ICICI Trust, to the new holding company, ICICI Financial Services.
Insurance is a politically sensitive subject in India. The government wants to raise the foreign direct investment (FDI) level in the insurance sector to 49 per cent from the present 26 per cent, but the Left supporters of the United Progressive Alliance (UPA) government are vehemently opposed to the move and have stone-walled it.
The US government has also brought pressure on India, reminding it of its commitment to raise the limit on foreign holdings in the insurance sector. Prime Minister Manmohan Singh and Finance Minister P. Chidambaram are all for pursuing further reforms in the financial services sector – including opening up pension funds to international players – but stiff resistance from the leftists has stalled the reforms.
With general elections barely two years away, it is unlikely that the government will be allowed to push ahead with further reforms in the financial services sector.