January 30, 2013 10:46 am

Goldman and M Stanley cool on India licences

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Two of the world’s most prominent investment banks have cooled on attempts to win a full Indian banking licence, in a sign of growing awareness of the costs facing international institutions seeking to expand in Asia’s third-largest economy.

Morgan Stanley last year won an “in principle” agreement from the Reserve Bank of India to receive a commercial banking licence, which would have allowed it to open at least one branch and begin conducting various types of new business, including foreign exchange transactions.

But the firm has since notified the regulator that it no longer wishes to proceed with the application, citing changes in the global economic environment, according to people familiar with the matter.

Meanwhile, Goldman Sachs confirmed it had applied for a licence in 2010 but has since made little progress and has stopped actively lobbying for the licence to be issued, according to people close to the situation. The bank is understood to be placing greater emphasis on expanding other areas of business and is not expecting to receive a licence in the near future.

Both Goldman Sachs and Morgan Stanley continue to look to expand their existing business in India, focusing on profitable areas such as institutional equities and investment advisory, where both ranked in the top three banks for M&A activity in India during 2012, according to Dealogic.

Both institutions declined to discuss their RBI applications, although a spokesman for Goldman Sachs said: “We see plenty of opportunity to grow our footprint and invest in India which continues to present enormous potential.”

India’s fast-growing banking system is set to become the world’s third largest as measured by assets by 2025, according to Boston Consulting Group, behind only China and the US.

However, the market has proved hard going for most large international banks, with only three long-term players – Citigroup, HSBC and Standard Chartered – establishing universal operations with more than two dozen branches.

Some global institutions have also scaled back their operations, including Barclays’ closure of its retail banking operations in 2011, and RBS’s unsuccessful attempt to sell its own Indian branch network to HSBC last year, a deal that foundered partly over regulatory issues.

The two banks’ decisions may disappoint India’s political leaders, who have been attempting to build bridges abroad after a period in which slowing growth and erratic regulation have soured some investors on the country.

In an interview with the Financial Times this week in London, Indian finance minister Palaniappan Chidambaram said that “foreign banks are welcome to come to India”, and stressed that his government adopted a more liberal approach to bank licensing than required under World Trade Organisation rules.

Analysts said the two banks began their applications with a view to building potentially lucrative businesses in areas such as fixed income operations and foreign exchange trading, which are not permitted without licences.

“At the time when they applied, which was three or four years ago, the situation in the US was much better, and they had fewer pressures on capital, so these new businesses looked attractive,” said Ravi Trivedy, an independent analyst and former head of banking at KPMG India.

However, the onerous regulations imposed by the RBI on foreign players operating bank branches, including rules mandating that about a third of lending be directed toward “priority sector” clients such as farmers, is also understood to have affected the banks’ thinking.

“The terms and conditions the RBI imposes for just one branch really are really impossible for a bank like Morgan Stanley or Goldman. It just doesn’t fit with their business model. So it’s no great surprise they now don’t seem to want to it,” Mr Trivedy said.

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