Indian Matchmaking: Banks, not Brides

By Yogen Mudgal, BSc Accounting and Finance Student at Warwick Business School

Dealmakers have been keeping busy in India this year, with the cash pouring into the country’s ecommerce sector on the one hand and distressed asset sales in industrials and travel on the other. However, amidst the rising PE activity and interest from Silicon Valley, a critical point of entry for one entity was overlooked. Indeed, the sale of Lakshmi Vilas Bank to Singapore’s DBS is a pivotal point in how the country’s financial industry will evolve out of its current crisis. The Reserve Bank of India won much praise for the managed rescue of the failing financial institution after the shambolic bailout of Yes Bank earlier in the year. This has rightly stoked a newfound interest for distressed Indian banks among FIG analysts around the world.

India’s small private lenders and state-owned banks are quite what you’d expect them to be – either a remnant of the country’s socialist past and stuck in the forgotten era of the license and quota regime or hasty entities out to make a quick buck with risky and often shady dealings. These bureaucratic, and often inefficient lenders are hardly a model of stability and are increasingly becoming a laggard on the economic progress of the young, fast-growing and dynamic subcontinent. Their inability to finance businesses aside, many of these lenders have gotten entangled with shady developers that were riding the real estate boom in the early 2010s. As the boom in construction disappeared, skylines of major Indian cities became dotted with incomplete projects and banks were left grappling with soured debt.

India’s financial system has been dealing with a liquidity crisis since 2018 when a non-banking financial lender, IL&FS, defaulted on its bonds. But the problem associated with the Indian financial sector runs much deeper and is vastly more fundamental. The country has become rather accustomed to corporate fraud, accounting indiscipline, government-driven debt relief and a vast pile of non-performing assets. State-owned and small private lenders have often been on the frontline of dealing with this ghastly paradigm of lack of formalised financial services nearly three decades after India first began its liberalisation process.

However, the ongoing woes of Indian lenders are not to say that the Asian giant cannot have successful banks. A recent report in the Economist goes to highlight how HDFC, a private Indian lender born in the rush of the 1990s has delivered the best performance in the world, beating out all the big American and European names that dominate the global financial industry. The key often lies in being able to have a network that spreads across the vast nation of 1.4 billion people, and recognising that business is done differently in the subcontinent. In homegrown Indian lenders, international banking groups will find just those synergies. DBS’s deal with Lakshmi Vilas Bank gives it that very hold of the financial infrastructure.

Most international financial institutions with significant business in the country like HSBC, Standard Chartered and Citi have restricted themselves to the large metropolises and the more formalised end of the country’s corporate activity. The lack of knowhow and an inability to grow into the country’s rural enclaves and smaller towns has kept them from benefiting from what until recently, was the fastest growing major economy. Larger domestic lenders’ weakness saddled with their own non-preforming loans and the Indian government’s newfound willingness to display to the world’s its open for business is right to draw interest. This is an opportunity for international banks to grow their business in India amidst shifting geopolitics and actively shape the industry’s future in the largely under-financialised economy.

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