What’s driving the foreign capital inflows —close to $15 billion so far this year alone—into financial sector of late? Already foreign institutions own 48.4% in HDFC Bank and 46.8% in ICICI Bank. The regulatory cap for foreign ownership in private banks is 74%.
Since January this year, there has been an influx of foreign investments in the country’s financial services companies, with October capping the biggest deals in Federal Bank and RBL Bank deals.
Blackstone invested Rs 6,196 crore in Federal Bank, while Emirates NBD acquired 26% stake in RBL Bank for Rs11,636 crore.
While each of these deals is significant, they signal something larger -a global relook at the country’s financial sector and growth potential. The sector was once considered over-regulated and fragmented, now it’s emerging as one of the world’s fastest-growing and most interesting destinations for long-term investments. The RBI has also taken a positive, but cautious, stance in allowing the entry of global entities.
According to McKinsey, the domestic banking industry is the largest sector 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 a recent report.
Yashraj Erande, global leader, fintech; India leader, financial institutions at BCG, told TNIE that the economics behind the rush for our financial sector assets are many: for one an investor can build valuation multiples, which are much higher than 1 and so is growth that’s higher than 2x; secondly RoE metrics are much higher here at 13-14%, and finally higher operating efficiencies make it easier for further scaling up.
He says, “We offer a large opportunity to build a strong balance sheet that can be added to the investor’s group balance-sheets. The PEs of smaller banks which are less than 1, means they’re coming in cheaper yet remains as a going concern and ensures that there is more upsides left in these banks. Bank credit to GDP growth ratio is so low here that in the past one decade it never crossed 1x, while the ratio is 1.8x.”
However, Erande cautions that “we need to be thoughtful about the source of the capital and we should be welcoming only long-term capital as geopolitics so complex now. Therefore, partners whose strategic interests are aligned should only be welcomed.”
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, Erande adds. Another analyst who heads the financial services vertical at a domestic rating agency, says most of the capital coming in especially from the UAE should be seen as strong political message to the West, especially to the US, with which our trade and diplomatic ties are at a nadir since early this year.
“The three huge investments by the UAE-based government owned entities is clear signal from New Delhi to the Western capitals, especially Washington—that we no longer are dependent on their money and that we’ve more than enough sources now for more stable fund flows,” he told TNIE, seeking not to be named.
