A conservative approach

While many of the leading banks in the US and Europe are still licking their wounds from the self-inflicted damage of the subprime crisis, and wait to see how governments will curb their ambitions, expansion into new markets is hardly likely to feature high on their agendas.

Not so in India, whose banking sector has come through the crunch period relatively unscathed. So much so, in fact, that many are looking for growth opportunities outside their domestic market, and consider it a matter of useful timing now.

So how did the Indian banking system avoid the same financial meltdown? Criticised in the past for being overly conservative, the Reserve Bank of India’s (RBI) tight regulatory stance paid off. The world of complex transactions such as securitisation and credit derivatives that was so loved by many Western counterparts were not actually permitted in India. Instead, old-fashioned banking traditions, such as lending to customers that they actually knew and where the risks were understood, served the banks well.

Of course, having a booming domestic economy with ready demand for credit also helped.

That’s not to say there wasn’t the odd scare. ICICI Bank, the country’s largest private sector bank, did at one point have customers queuing to withdraw their money as concerns about the bank’s UK subsidiary’s exposure to Lehman Brothers rocked confidence for several days. But the situation settled down fairly quickly after the RBI stepped in to allay concerns.
Additionally, the push for ever-bigger banks within domestic markets and cross-border that had swept across the US and Europe has not been matched within the Indian banking scene. India’s banks do not feature high in the ranking of the world’s, or even Asia’s, largest banks.

But as Indian corporates globalise and many parts of the domestic market become over-banked, it seems natural that institutions are now looking abroad for new business.

Launch pad
With cultural, trading and commercial ties going back several centuries, the Gulf region and the UAE in particular are an obvious starting point for an Indian bank looking to expand overseas.

Not only is there the large expatriate community of more than one million Indians — about 40 per cent of the population in the UAE — to respond to, but India became the largest trading partner for the UAE in 2009.

None of this is new, of course, and a few banks saw the potential of the UAE many years ago, none more so than Bank of Baroda (BoB). The third-largest bank in India — 53.8 per cent state-owned with a large pan-Indian branch network and a presence in 26 countries — BoB has had a presence in the UAE for more than 35 years.

With six offices in the UAE, it not only serves the Indian community but offers a range of products and services to all business sectors — larger corporates and small and medium enterprises (SMEs). It has participated in providing finance to several of the leading entities in the UAE, such as Dubai Electricity and Water Authority (DEWA), and Abu Dhabi-based International Petroleum Investment Company (IPIC).

Of course, the corporate sector has not been without its problems in the past few years. BoB does have exposure to Dubai World, but not enough to concern the international rating agency Fitch, which at the end of 2009 issued a statement stating that the bank’s credit rating would not be affected by such exposure.

The bank is planning further expansion in the UAE and the wider Gulf region. It already has six branches spread across the emirates, and a presence in Bahrain and Oman. State Bank of India (SBI) has a fully fledged branch at DIFC, and offers corporates banking services. It will soon start to market SBI’s Indian products, such as home loans and NRI/NRO/FCNR accounts

Shared optimism
It seems that BoB and SBI’s optimism for the outlook for the region is shared by a large number of compatriots. In the past six months, there has been a steady stream of India’s financial institutions obtaining licences to operate out of DIFC.

Punjab National Bank (PNB) and Indian Overseas Bank (IOB), IDBI Bank and Kotak Mahindra Financial Services have all opened offices in DIFC in the past few months. Canara Bank, the third-largest bank in India in terms of domestic operations, has taken another route, opening its first regional representative office in Sharjah (the first Indian bank to do so).
For some of these banks, such as IDBI Bank Ltd — the second largest syndicator of loans in India and fourth largest in the Asia-Pacific — it is its first overseas branch. IDBI’s licence from DIFC will enable it to provide a full range of corporate banking services including financial advisory and syndicated loans. IDBI expects to utilise its expertise in financing large-scale projects.

IDBI’s Deputy Managing Director B.P. Singh, says, “Our decision to establish an office in DIFC reflects our strong belief in the vast growth potential of the GCC region. The business segment of the UAE has a unique international fabric, with Indian businessmen constituting an integral part of that.” In other words, the synergies are well-known, and implicit.