MUMBAI: What’s driving the tons of foreign capital—close to $15 billion so far this year alone--once closely held, tightly protected, dominated by domestic promoters and conservative regulations, into financial sector of late? What is the value UAE and Japanese banks and other Western fund houses see and want to be lapping up in these small private sector banks and a few non-banks? Already foreigners own 48.4% of HDFC Bank and 46.8% of ICICI Bank. The regulator cap for foreign ownership in private banks is 74%.
The latest in the series came on the third Friday of October, with Blackstone announcing acquisition of a 9.99% stake in Kerala-based Federal Bank for Rs 6,196 crore. A week before marked as the largest foreign equity inflow into the history of the domestic banking space when the Dubai-based Emirates NBD announced a Rs 26,853-crore acquisition of a 60% stake in the mid-sized RBL Bank, becoming the largest foreign takeovers in the domestic financial sector (If the deal goes through it the Dubai government owned lender will have to make an open for an additional 26% too in the Mumbai-based lender). Between May and August saw Japan’s second largest banking group SMBC with trillions in assets agreeing to settle for a minority 24.22% in Yes Bank, just as an investor and not as a promoted for Rs 15,950 crore.
Early October also saw the Abu Dhabi’s International Holding picking up 43.5% stake in the non-banking Sammaan Capital (formerly Indiabulls Housing), for nearly Rs 8850 crore.
Earlier in April, IDFC First Bank said global fund house Warburg Pincus would invest Rs 7,500 crore and the Abu Dhabi Investment Authority would put in Rs 2,624 crore.
Earlier in March, Kotak Mahindra General Insurance completed a 70% stake sale for Rs 5560 crore million to Zurich Insurance. The same month also saw Bain Capital acquiring 265 stake in the Kerala-based gold loan player Manappuram Finance for around Rs 4,385 crore, a deal that will lead to a joint control structure with the existing promoters after the mandatory 26% open offer.
Years bank in 2016, the Reserve Bank made an exception in allowing the Canada-based Fairfax Holding, promoted by NRI businessman Prem Watsa, to acquire a controlling 51% of Catholic Syrian Bank for Rs 1,000 crore.
While each of these deals is significant on its own, they signal something larger--a global relook at the country’s financial sector and growth potential. The sector was once considered as over-regulated and fragmented, but now it’s emerging as one of the world’s fastest-growing and most interesting destinations for long-term investment in financial services. The RBI has also taken a positive, but cautious, stance in allowing the entry of global entities.
According to McKinsey & Company, the banking industry is the largest sector in India by net income, generating $46 billion in 2024, with a 31% annual growth. Banks’ revenue growth is expected to be healthy in both retail and wholesale banking as financial penetration deepens. “Despite strong performance, the banking sector is valued lower among industries, indicating market scepticism about long-term value creation,” McKinsey said in its latest report on global banking.
Our financial services sector is expanding faster than major global economies with credit demand robust from small businesses, retail consumers and housing. On the other hand, the formal banking system is matching the broader economic growth. “Key factors that contribute to banks’ resilience include low exposure to tariff-hit sectors, deleveraging by companies and a focus on secured retail lending,” S&P said in a recent report.
Yashraj Erande, global leader, fintech; India leader, financial institutions based in Mumbai, told TNIE that though reasons for such large investments depend on whether the investment is made as a strategic one or as a financial investor, the economics behind this rush for our financial sector assets are many: For one an investor can build valuation multiples which are much higher 1 and so is growth that is higher than 2x; secondly the RoE metrics are much higher at 13-14 than elsewhere, and thirdly operating efficiencies here are so high scaling them up further is much easier.”
Also, according to him the country offers a large opportunity to build a strong balance sheet which can be added to investor’s balance-sheet. For financial investors the PEs of smaller banks which are less than 1, means they are coming in cheaper yet remains as a going concern. This could be because of poor management, which ensures that there is more upsides left in these banks. Bank credit to GDP growth ratio is low here that in the past one decade it never crossed 1x, leave alone growing at the ideal 1.8x.
But Erande cautions that “we need to be thoughtful about the source of capital. We are open to welcome committed and long term capital in this complex geopolitical environment. Therefore, partners whose strategic interests are aligned are welcome to deploy capital and partake in our phenomenal decade of growth.”
All these also calls for consolidation among old generation private sector banks, which don’t have enough capital to grow faster with a low PE to book value of 0.7, he adds.
Another analyst who heads the financial sector vertical at a domestic rating agency, seeking not to be named told TNIE that most of these capital coming in especially from the UAE should be seen as strong political message to the West, especially the US, with which our trade and diplomatic ties are at a nadir since early this year.
“The three huge investments by UAE-based government owned entities is clear signal from New Delhi to the Western capitals, especially Washington—that we no longer are dependent on your money and that we have more than enough, more stable sources of fund inflows now,” he said.
On why SMBC could not get control of Yes Bank, he feels that one reason could be the fact Japanese institutions want control over what they own. RBI was reportedly ready to offer them controlling stake but not equal voting rights which it insisted would be capped at 26% which the Japanese were not ready to accept.
On the other hand what is working in the favour of Emirate entities is their government ownership along with our government’s favourable political equation with them.
He also sees these investment as a way of internationalizing the rupee given the massive trade ties with the Middle East.
Another reason for this influx of money flow is that consolidation among private banks looks difficult given their strong regional identities so the only way to survive is to get foreign capital.
The message is clear, according to analysts that we welcome capital, provided control and compliance of our banks and non-banks stay fully within domestic regulations and they remain largely insulated from global shocks which their parents may suffer. That means this is a measured or controlled liberalisation offering an ideal entry point for global financial players facing stagnant growth in their home markets.
