Vault Matters | Why Japanese and Middle East investors should be welcomed into the Indian banking sector

IDBI Bank and Yes Bank deals may pave the way for more such entrants into the banking system in the long-term.

It’s never easy to welcome a guest into our homes, especially when we know that the room may have to be shared on a permanent basis and the guest could become a part of our family.

Even though the moves of Japan’s Sumitomo Mitsui Banking Corporation (SMBC) and Dubai’s Emirates NBD to take majority stakes in Yes Bank and IDBI Bank respectively are in the initial stages, there are media reports suggesting opposition to both these transactions. However, if one must take a long-term view about the future of the sector, it’s important that both these transactions go through. Here are four reasons why:

Strengthen business: IDBI Bank and Yes Bank are cases of a turnaround. Both had the same problems of asset quality issues which hurt their balance sheet growth for many years before they could come to a stable state. What’s missing though is a convincing growth strategy.

While IDBI Bank, owing to its deeper penetration, has had better success in the retailisation theme, Yes Bank is still struggling. The other common thread for both the banks is their strong corporate lending business, which was once their foothold. Today, in the process of turning retail both have lost steam in the corporate side and the business isn't what it used to be a decade ago.

SBMC and Emirates NDB are very strong in the trade financing, infrastructure lending and project finance businesses. With a lot of bilateral projects opening up between India, Japan and Middle East, particularly on infrastructure investments, deepening presence in these pockets of corporate lending could help IDBI and Yes Bank chart out a better growth trajectory, including their path towards retailisation.

Meaningful capital infusion: Where will the capital for Indian banking system come from? Large conglomerates still don’t have a passage into the sector, similar to what exists in the rest of the world. Therefore, serious money then will have to come from deep-pocketed foreign investors including foreign banks. The good thing about Indian banking laws is that it requires a foreign bank to take the shape of a local in spirit and form, if they want to do business in the country. To that extent, a foreign bank will have to become an Indian entity with respect to compliance, repatriation of capital, etc. and hence the fears about colonisation of Indian banking system may be a bit exaggerated. If anything, Yes Bank and IDBI Bank deals may pave the way for more such entrants into the banking system in the long-term.

Need for newness: The current wave of upgradation in the banking system, whether in terms of ideation or execution has happened thanks to the banks which germinated back in the early 1990s. While we have seen another wave of bank licensing resulting in the birth of Bandhan Bank and IDFC First Bank, one is yet to see positive outcomes in the form of new ideas seeping into the banking sector. In other words, a breath of freshness is evidently missing in the sector and banks seem to have run out of ideas. Simply put, we are having more of the same today, whether in terms of technology, products, strategy or operations. Ushering new strong global names is important to see a fresh wave of thinking, particularly on the business and strategy innovation front.

Fresh talent: The last time banking industry saw an influx of people from across all spheres, including foreign banks, was in the late 1990s and early 2000s. There was interest across the board to be in the banking sector and bankers wore their badge with pride. However, in the last 7 - 10 years, banking sector has become a mirror of the consulting industry, with respect to talent. Leaders get poached along with their teams and it's the same set of people moving from one bank to another.

Banking sector is on the verge of losing its glamour from an employment perspective. This practice, from a cultural standpoint could be toxic and stifle innovation. The need of the hour for the industry is an inflow of new talent, just like it needs new ideas. That may not be possible unless strong foreign names enter the country and make it attractive for people across levels, including leadership positions to enter the banking sector and reorient themselves differently.