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22 July 2024

Ready to take centre stage

By Mary Jones

PLAYING A BIG ROLE Bank of Baroda is the only Indian bank offering a full range of services in the UAE (SATISH KUMAR)


Indian banks are gearing up to play a bigger role globally, particularly in the Gulf region, as the domestic market prepares to cope with the challenges posed by foreign banks in the wake of sweeping liberation in the country’s banking sector by 2009.

Indian Minister of State for Finance Pawan Kumar Bansal, who was in the UAE last week, discussed the current and emerging scenario of the sector, which is poised to position Asia’s second-fastest growing economy as the third-largest banking hub in the world by 2040.

The minister said Indian banks are being encouraged to expand overseas as well as enter into operational collaborations with each other to cope with the kind of challenges that would be thrown up when the second phase of the opening up of the banking sector to foreign competition starts in April 2009.

Here are excerpts from the interview:

Indian banks are now making their presence felt in overseas markets. However, in the Gulf region, where a large number of Indian expatriates live, their presence is less than significant. What is your roadmap to ensure a far stronger presence for them in the Gulf?

—I agree that Indian banks – with the exception of a few banks with full-fledged operations in the UAE, Bahrain and Oman – are not present in the Gulf. However, more banks are now making their presence known in this fast growing region by opening representative offices.

We are in discussions with policy makers and continue to explore the prospects of getting approvals to step up operations in the region. In the UAE, Bank of Baroda is the only Indian bank offering full-fledged banking services, while Union Bank of India, ICICI Bank, UTI International, State Bank of India, Axis Bank, IndusInd Bank, Housing Development Finance Corporation, HDFC Bank, Punjab National Bank, Andhra Bank, and Export-lmport Bank of India, operate either as a representative office or a branch at Dubai International Financial Centre. Indian banks also operate in Qatar, Bahrain and Oman. I am optimistic that both the GCC and India will soon see a liberal era of co-operation in the sector.

How can the Gulf countries and India further bolster their economic and investment ties?

—India is offering a tremendous opportunity to foreign investors to take part in its $500 billion (Dh1.8 trillion) worth infrastructure development programme that has received financing commitments from various institutional and multi-lateral investors. The UAE’s investors can play a key role.

How well is India’s domestic banking sector entrenched to face the increasing competition from foreign banks after 2009 when the sector is expected to open up?

—The Federal Government and the Reserve Bank of India will facilitate public sector and scheduled banks in raising capital to compete with global banks after the banking sector, which is an important sector in the economic reform process, opens in 2009.

The RBI has either received applications for or is in talks with a host of foreign banks for licences to operate in India. The foreign banks are attracted by the idea of servicing a fast-growing economy and the promise of a liberalised scenario in 2009. India’s booming economy posted a massive 9.4 per cent GDP growth rate last year. That makes an average of 8.6 per cent achieved during a period of three years.

Currently, Indian banks are evolving to meet international standards and are in the process of consolidation in preparation to meet the global standards. Foreign banks with a large capital base, advanced technology, best practices in audit, accounting and transparency and skilled personnel are going to pose a significant challenge to Indian banks. One of our goals is to enable banks to compete with counterparts globally.

The migration to the Basel II norms has created a need for larger capital base and, therefore, the government and the Reserve Bank of India are exploring necessary measures to facilitate capital raising by banks, especially public sector banks.

Towards this end, Indian banks are being actively encouraged to expand overseas. The government is also facilitating operational collaboration.

The Securities and Exchange Board of India (Sebi) recently tightened rules on foreign investors’ use of an investment instrument known as a participatory note. Is the government considering any moves to control the fund inflow?

—There is no proposal at present for more checks on inflow of capital. Foreign funds have pumped around $17 billion (Dh62bn) or more so far this year into the Indian stock market, sending the main index soaring to a series of highs and pushing the rupee up to record peaks. The Sebi move was aimed at improving flow transparency and moderating funds coming into the country.

The Indian rupee has appreciated by 12 per cent over the last few months due to strong inflows of US dollar and the government is taking measures to make the country’s exports more competitive in overseas markets. Besides increased capital flows, a depreciation of the US dollar against major currencies has led to appreciation of the rupee vis-a-vis the US dollar. The RBI has risen to the occasion by buying US currency to stabilise the situation.

What progress has the sector achieved in the migration to the Basel II norms? When are the banks going to fully comply with the norms?

—The Indian banking sector is geared up to embark on the Basel II reforms next year. By 2009 when the government is due to review the nation’s financial sector, we expect domestic banks to raise a larger capital base for better market and operational risk management in order to stay competitive.

It is also imperative that banks should go in for inorganic growth and penetrate rural markets in order to reduce risk through diversification. There is evidence to indicate inorganic growth is one of the best ways to compete with large global banks. This allows banks to expand their geographic reach and product portfolios and helps in risk diversification.

In 2009, India will review laws that currently allow foreign banks to hold less than five per cent in domestic lenders. The government has also set March 31, 2008, as the deadline for implementing Basel II norms for foreign banks in India and Indian banks operating abroad.

How would you describe the performance of the public sector and private sector banks this year?

—Indian banking is on the threshold of exponential growth. The public sector banks have been adopting corporate governance to infuse greater efficiency and accountability and the government is committed to creating a competitive environment. The government is in favour of consolidation among public sector banks. However, it will only facilitate a merger and the proposals have to come forth from banks. Our banks recorded a record impressive credit growth over the past three years while the non-performing assets have shown a drastic reduction during this period. During 2006-2007, the sector has registered a 23.3 per cent credit growth. The credit-deposit ratio has improved to 74 per cent in 2006-2007 from 53.1 per cent in 2000-2001, exhibiting exponential growth.

Due to proper sequencing of economic and banking sector reforms, the balance-sheets ofa number of Indian banks have increased significantly in the last 15 years, with commercial banks in the country having a comfortable Capital Adequacy Ratio of 12.3 per cent.

Are there any new proposals for mergers in public sector units?

—We have not received any new proposals from any public sector banks for a merger. There are no new proposals for absorption of more associate banks into India’s top lender State Bank of India beyond an existing proposal to absorb one associate bank.