Foreign interest: Growth prospects draw investment into financial sector

The financial sector in India is witnessing a significant interest from foreign entities. Last week, for instance, United Arab Emirates-based Emirates NBD PJSC entered into an agreement with RBL Bank, a mid-sized private bank, to invest ₹26,850 crore, or about $3 billion, to acquire a controlling stake of up to 60 per cent. Subject to regulatory approval, this will be the biggest foreign investment in an Indian private bank. The investment, according to the management, will help RBL Bank move into the league of large Indian banks. It will help the bank strengthen its presence in corporate banking — Emirates NBD already has a significant presence in Indian wholesale banking. Once the transaction is completed as planned, RBL Bank will become a listed subsidiary of a foreign bank. Although the issues related to the mandatory open offer and public float will be worth watching, the investment agreement marks a significant milestone in Indian banking history. 

Earlier this year, Japanese lender Sumitomo Mitsui Banking Corporation (SMBC) acquired 24.2 per cent in Yes Bank. It was recently reported that SMBC did not, for the moment, intend to increase its shareholding in the bank beyond 24.99 per cent. Going beyond 25 per cent will trigger the mandatory open-offer requirement.  Nevertheless, SMBC’s stake in Yes Bank is another example of foreign interest in the Indian banking pie. Five years ago, DBS Bank India took over Lakshmi Vilas Bank at a time when the latter’s finances were deteriorating. Investment by foreign entities has been facilitated by the evolving regulatory openness in India. Foreign entities can own up to 74 per cent, subject to regulatory approval. However, voting rights remain capped at 26 per cent, which is aimed at providing adequate diversity and independence at board level. It is also interesting that over the years, while several American and European banks exited India’s retail banking, partly due to their parent entities’ international restructuring, non-American and non-European institutions are entering the Indian financial landscape. More recently, in the non-banking financial company (NBFC) space, Abu Dhabi’s International Holding Co PJSC took 42 per cent in Sammaan Capital for about $1 billion.

 

The reason for the interest in the Indian financial sector is, of course, potential growth. India is not only the fastest-growing large economy in the world, it also has significant untapped potential for formal finance. As has been highlighted in this space before, there is a significant market for credit waiting to be tapped, which currently depends on informal sources of finance. Research has shown that the increased adoption of digital means can be transformative and has helped push credit in the underserved sections without resulting in higher defaults. Fintech and financial firms can leverage the Unified Payments Interface (UPI) data to extend credit in the underserved segments. Necessary regulatory clarity can open up a huge market in this space. On the corporate side, opportunities will continue to emerge as the economy grows. The Reserve Bank of India, for instance, has proposed allowing banks to finance acquisitions by Indian corporations. On a broader level, increased availability of foreign investment in private banks and NBFCs will intensify competition in the financial sector, resulting in better services at a lower cost for both corporate and individual customers. 

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