India’s financial sector is worth about US$28 billion and continues to have strong growth, having undergone considerable regulatory reforms since the 1980s. India has since adopted more liberal and progressive policies leading to vibrant equity and debt markets and prudent banking norms. This has allowed India to keep pace with the growing needs of corporate and other borrowers. Banks, capital market participants and insurers have also developed a wide range of products and services to suit varied customer requirements.
India has a transparent, highly technology-enabled and well-regulated stock market. With the largest number of listed companies - 10,000 - across 23 stock exchanges, India has the third largest investor base in the world. Its modern commodities exchange market ranks among the top 3 global markets in terms of traded volumes, with and trades totaling over US$650 billion in 2006-07. NCDEX, MCX and NMCEI are the major national exchanges with a diversified portfolio of commodities that include agri-products, bullion, metals and energy. India was the first country to provide trading in steel futures and its exchanges also offer future contracts.
Presently the total asset size of the Indian banking sector is US$ 270 billion and total deposits amount to US$ 220 billion with branch networks exceeding 66,000 branches across the country. It is projected that there will be an emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The favorable government policies and reforms for increasing the limits of foreign investments to 49 per cent among other key initiatives have encouraged growth in the financial sector. In addition, as a result, larger banks will be able to mobilize sufficient capital to finance asset expansion as well as fund investments in technology.
The Indian capital markets have witnessed a transformation over the last decade. India now ranks among the mature markets of the world. Key progressive initiatives in recent years include: The infotech-driven National Stock Exchange (NSE) with a national presence (for the benefit of investors across locations) and other initiatives to enhance the quality of financial disclosures.
The Securities and Exchange Board of India (SEBI) has effectively been functioning as an independent regulator with statutory powers, The Mumbai Stock Exchange continues to be the premier exchange in the country. The stock exchange has about 6,000 listed companies and an average daily volume of about a billion dollars. Many new instruments have been introduced in the markets, including index futures, index options, derivatives and options and futures in select stocks.
Foreign and private Indian players are keen to convert untapped insurance market potential into opportunities by providing tailor-made products. These include innovative products, services and value-added benefits. Major foreign players who have entered this market include New York Life, Aviva, Tokio Marine, Allianz, Standard Life, Lombard General, AIG, AMP and Sun Life among others. The Insurance Regulatory and Development Authority (IRDA) has played a proactive role as a regulator and a facilitator in the sector’s development, The market’s potential is estimated to have a premium income of US$ 80 billion with a potential size of over 300 million people.
The US-India Financial and Economic Forum estimated India’s long-term infrastructure financing requirements at US$ 500 billion. This presents a key opportunity to US financial firms. US financial firms set international benchmarks in audits and accounting standards, while India firms are reputed for their expertise in credit/currency derivatives. This in itself sets the stage for increasing mutually-beneficial financial-sector dealings between both countries, apart from ongoing associations.
India’s corporate bond market still lacks sufficient depth to attract any considerable foreign investment, although this is likely to change in future. In addition, by investing in India’s corporate bonds, US financial firms can avoid regulatory obstacles otherwise faced in ordinary banking activities carried out through branches. Beginning in April 2009, foreign banks will be able to acquire stakes in India banks.
India’s financial framework remains innovative, particularly its non-banking financial corporations (NBFCs), which can raise credit absent of a deposit base. The Indian Government presently permits 100% foreign equity in these institutions, without requiring priority sector lending on their part. It is unlikely that foreign banks will be free from all branch licensing requirements, although they can expand in rural areas.
Despite an increasing expansion of credit availability in recent times, India still lacks any centralized credit information bureaus. It is unlikely that reciprocal information-sharing arrangements among banks and financial institutions can continue for long. Therefore, US credit reporting bureaus may find a potential opportunity in India, more so with certain private banks recently reporting losses on their housing and retail lending portfolios.
In recent times, India’s financial sector has achieved lesser costs of financial intermediation, resulting in the emergence of several smaller, privately-owned Indian banks. However, credit is still largely unavailable to agricultural and small-scale industries, more so with government-channelized ‘priority sector’ lending to these sectors being eased. US financial firms can thus also consider the alternative of tapping into India’s potentially-large depositor base or micro-credit financing to India’s small and medium enterprises.
It is evident that there is significant business opportunity for US financial firms in India, in particular in rural areas where there is a large deposit base and large opportunities for micro-credit financing. Investing in corporate bonds is also a safer alternative, given the lack of any regulatory hurdles.
