MUFG, HSBC bet big on GIFT City in warning to Asia hubs

The hub seeks to facilitate more Indian trading and lending - capturing market share from more established financial centers like Singapore, Hong Kong or Dubai. Bloomberg

Global banks are flocking to India’s newest finance hub to take advantage of the nation’s surging demand for US-dollar denominated debt, taking a key business away from Asia’s more established centers such as Hong Kong and Singapore.

Banks in the Gujarat International Finance Tec-City disbursed nearly $20 billion in dollar loans to Indian corporates in the fiscal year ended March, more than a third of the total issued for local companies globally. That’s up from two years ago, when banks at the hub disbursed only 16%, according to data from the International Financial Services Centres Authority, or IFSCA, the hub’s regulator.

Mitsubishi UFJ Financial Group Inc., which set up operations in GIFT City in 2022, now issues most of its debt to Indian companies from the hub, where the lender’s book accounts for two-thirds of its $20 billion India balance sheet, according to people familiar with the matter. An MUFG spokesperson declined to comment on the growth of the bank’s GIFT City loan book.

Another top lender, HSBC Holdings Plc, is building its international trade finance portfolio from the hub and expanding into areas including wealth and cross-border markets products, according to the bank’s India chief executive Hitendra Dave.

State Bank of India, the country’s largest lender, is targeting about 10% annual growth in of its GIFT City branch portfolio, according to chairman CS Setty. “Corporates that earlier parked their funds in global centers like London or New York are now placing deposits in GIFT City,” he said.

The increased business for banks marks an early win for Prime Minister Narendra Modi’s pro-business pet project in western India nearly two decades in the making. The hub seeks to facilitate more Indian trading and lending - capturing market share from more established financial centers like Singapore, Hong Kong or Dubai.

The lure is a slew of tax incentives, including a 10-year tax holiday on business income. For loans, the absence of any so-called withholding tax — the levy charged on a loan or bond’s interest income — is a major draw. That allows bankers in GIFT City to offer cheaper financing than those in more established hubs, where the withholding tax ranges from 10% to 15%, according to lenders such as Standard Chartered Plc and MUFG.

“GIFT City is taking a larger share of the offshore borrowing market for Indian companies,” said Vivek Ramji Iyer, a partner at Grant Thornton Bharat LLP. That growth is “a warning call for more established centers like Hong Kong and Singapore.”

It’s clear why India is so keen to capture a piece of the lending business. Robust economic growth and more accommodative government policies are ushering Indian companies into a new phase of investment following a bad loan cycle that peaked with the collapse of shadow bank Infrastructure Leasing & Financial Services Ltd. in 2018.

S&P Global Ratings expects top businesses in India to boost spending and capital expenditure over the next five years. They expect capex of about $800 billion between fiscal 2026 and 2030, and a further $1 trillion by fiscal 2035.

Lenders ranging from banks to private credit firms are rushing to finance that growth, especially as a lingering property crisis in China is hurting growth prospects for the region’s dominant source of corporate debt. The pace of issuance may increase further after India’s central bank in October proposed regulatory changes that would make it easier for firms to access foreign funds.

“Borrowers are increasingly preferring to borrow from GIFT City than global centers such as London, Singapore, Mauritius and Hong Kong,” said Sachin Shah, managing director and head of strategy at Standard Chartered in India. The all-inclusive borrowing cost is around 50 to 70 basis points lower depending on the company’s international ratings and nature of the loan, he said.

Banks are rolling out new products there, too. Shashank Joshi, deputy chief executive at MUFG Bank India, said the bank’s GIFT unit offers products including foreign currency loans, structured products and trade financing to Indian corporates. The lender sees future growth coming from offering its global treasury products.

Businesses other than lending are growing too. Banks in GIFT City manage $94 billion as of June, nearly triple the amount three years prior. HSBC holds about $10 billion there.

The British bank offers nearly 50 international products at GIFT City and is also planning to provide insurance products for resident and non-resident clients.

Already, some domestic banks have scaled back business in foreign hubs. Axis Bank Ltd., one of the nation’s largest private lenders, consolidated its foreign business to GIFT City during fiscal 2020 by shutting branches in Hong Kong, Shanghai, Colombo and London, according to Vivek Srivastava, chief executive for the GIFT City branch. It also shifted its own debt fundraising operations to GIFT City from Dubai.

As chairman of the IFSCA, K. Rajaraman walks a line between regulating the financial hub and singing its praises to prospective tenants. In the office, there’s a framed excerpt from Modi’s speech at the hub in 2017, where he made a goal of setting prices for some of the largest traded instruments in the world – commodities, currencies or equities – within the next decade.

“If you ask me the big picture, it is to provide Indian corporates global capital at the most competitive rates,” said Rajaraman.

The way he sees it, the shift of the earlier SGX Nifty contract, the main equity derivative contract for Indian stocks, was a success. Previously traded in Singapore, the shift in July 2023 helped boost the derivatives business in GIFT City, with annual equity derivatives turnover on the NSE International Exchange crossing $1 trillion in the fiscal year ended March, up from $255 billion in fiscal 2023.

Rajaraman points to the nearly 200 fund entities that have set up in the hub, mainly bringing in non-resident Indian funds, as well as an increase in aircraft leasing financing, a business traditionally dominated by Dublin and Singapore.

Early Stages

Still, a lot of this is in early stages. The push for Indian corporates to raise foreign equity capital from the hub is off to a modest start, with no immediate plans for large Mumbai-listed companies to tap the market.

The central bank’s attempt to lure back some of the rupee trading by starting a non-deliverable forward market has been met with a lukewarm response by banks, who still prefer hubs like Singapore where there’s more liquidity. The Indian government’s push to spur green bond trading in the hub has been a non-starter.

Companies have struggled to attract talent to the hub, which still can’t compete with more established cities in the way of perks, infrastructure and socializing. A survey of senior executives found 63% were unwilling to move due to limited professional and personal networks, according to a report by PricewaterhouseCoopers.

“Despite its progress, GIFT City has considerable ground to cover before it can outpace established global hubs and emerge as a leading international financial center,” wrote Gayathri Parthasarathy and Amitabh Mukherjee, who authored the report.

Broadening Scale

For the time being, Rajaraman, the IFSCA chairman, has his sights set on getting more corporate treasuries to set up operations, growing the fintech ecosystem, developing the bullion exchange and facilitating more commodity derivatives traded out of GIFT City.

Yashraj Erande, who leads the financial institutions practice for India at Boston Consulting Group, applauded the speed of development happening in GIFT City, but said the hub now needs to develop relative global scale.

“Ecosystems like DIFC and Hong Kong become very powerful when you have deep markets across multiple products and a set of services to go along with these products,” said Erande. “That is important for GIFT City to get to.”