A regional bank, XYZ Bank, has decided to open an office overseas for serving those businesses that are expanding internationally. India has been chosen as a large financial centre that is believed to help in increasing customer base and expand business. The various factors favourable for investing in India are its political stability, federal legal system, availability of managerial and technical skills, good infrastructure, favourable economic policies and relaxation of restrictions in banking sector. However, some key challenges are cultural diversity, need of legal expertise in opening a wholly owned subsidiary and regulatory restrictions in banking sector. In spite of the challenges, India seems to be a good investment option and beneficial for all stakeholders.
Keywords: Expansion, Indian Economy, Overseas Presence, Economy
XYZ Bank is an ambitious and a fast growing bank. To continue growing at this pace, the bank has decided to have an international presence. It delves into the possibility of opening an office in another country with a large financial centre. This will not only help the bank expand but will also help its customer base. The success of this plan, largely, depends on a thorough analysis of the socio-economic, political and technological factors of the country chosen. Being a senior official of the bank, I have been entrusted with this task of identifying a financial centre. On exploring various locations for this proposal, I have chosen India for our expansion plan. I shall discuss the various factors that affect my investment decision in India, along with a few challenges that we may face in this new environment.
Factors Favouring Investment in India
India is a developing country located in Southern part of Asia. India is the second most populous country in the world with a population of over 1.2 billion people (Wikipedia, 2012). India is a wholesome mix of different religions, traditions, ethnicities and way of life. Different regions have different food habits, speak different languages, cultivate different art forms and live a different life. However, these differences are blended together beautifully to form a diverse but united India. Understanding the needs of such diverse customers is a challenge, but a thorough segmentation analysis and designing custom-made solutions of customers will help in winning the battle.
Indian education system consists of both public and private players. Government intervention through schemes like ‘Mid Day Meal’ has considerably increased participation rate in primary education. Higher education system is India has grown and improved remarkably in the past few decades. India is one of the best in the world in terms of quality of technical education and technical talent. However, quality of education varies across institutions, which is one of the challenges in India’s educational system. Literacy rate in India has grown to 75.06% in 2011 against 12% in 1947 (Wikipedia 2010). This is a good indicator of socio economic progress of India. Availability of managerial and technical talented would be an advantage in setting up an office in India.
Focus of Infrastructural Development
Infrastructure is one of the tools to facilitate economic growth and due importance is given to it in India. According to Crisil (2012) report on Union Budget of fiscal year 2012-13, limit of tax free infrastructure bonds has been doubled to improve flow of funds in this sector and allocation to urban infrastructural development programme has been trebled. The budget has also stated the need of developing the IT infrastructure in the country. All these are positive factors for setting up a business in India.
Political and Legal System
Indian Judicial System is three-tiered with Supreme Court at the highest order, followed by High Courts at state level and District Courts at district level. The further lower orders of Indian Judicial System comprise of family courts, civil courts and criminal courts. The foundation of Indian law is based on the English Common Law. As written in the Constitution of India, India is a “Sovereign, Socialist, Secular, Democratic, Republic”. India has a federal structure of government. The President of India represents the state and Prime Minister of India represents the government. Government is formulated through elections. India has a multi-party system and a party wins the elections on the basis of majority of votes. State political parties operate in a specific state; where as National parties participate in elections all over India. The two dominant National parties in India are The Congress and The Bhartiya Janata Party. The federal nature of political system, lack of political unrest and the elaborate judicial system are other factors that make India a favourable investment destination.
Indian Economy and Trade Policies
Indian economy is the ninth largest economy in the world by nominal GDP and is one of the fastest growing economies in the world (Wikipedia 2012). India’s economic growth is estimated at 6.9 % for 2011-12 (Crisil 2012). Growth of India can be, primarily, attributed to the growth in service sector. At the time of independence, private sector played a very insignificant role in Indian economy. It was characterized by a pre-liberalization era of a closed economy and high import duties. In the past few decades, India has made conscious efforts, through strong economic reforms in early 90s, to more towards liberalisation of international trade policies and relies on market forces. Indian economy is, now, a market-based economy. Private sector plays a pivotal role in the country and its importance is well acknowledged by the government.
According to World Bank, in recent years, Indian government’s stand on trade and investment policy has a clear shift from ‘protecting producers’ to ‘benefitting consumers’. India is now striving for a more liberal global trade policy, especially in the field of services. Also, India is making efforts in the direction of regional economic integration through regional trade agreements (RTAs). Such efforts increase a country’s international trade opportunities and boosts economic growth. Though, such practices may also lead to trade diversion. According to Jiangyu Wang (2006), a study of International Monetary Fund suggests that the members of RTAs in Asia showed more openness towards non-members than other RTA countries outside the region do. India has also liberalised its policy on foreign direct investment (FDI) and considerably reduced intervention in private sector. However, a lot of government intervention is seen in the agriculture sector in the form of subsidies.
The fast paced economic growth, focus on service sector, liberal trade policy, reliance on market principles and shift in focus to consumers are favourable factors for choosing India as a location for overseas presence.
Financial and banking System
Indian financial system has evolved from a barter system to a well organised and elaborate system, as it stands today. The institutions in the organised Indian financial system comprise of Regulators, Commercial Banks, Financials Institutions, Nonbanking financial companies (NBFCs) and Capital Market Intermediaries. Commercial banks include public sector banks, private sector banks, foreign banks and cooperative banks. Reserve Bank of India (RBI) is the central bank of India. It helps in the smooth functioning of the banking system and maintains monetary stability in the country. It is the regulatory body of banks and gives them policy directives. It sets the policy ratios like bank rate and reserve ratios like cash reserve ratios from banks to ensure adequate liquidity in the system at optimum risk levels. RBI provides guidelines on priority lending for commercial banks. It is also responsible for providing branch licenses to banks and this can be a challenge in setting up a branch in India.
RBI revised the guidelines on FDI in banking sector on March 5, 2004 which stated that foreign banks are permitted to be present in India either in the form of wholly owned subsidiary or branches (RBI, 2005). The benefit of having a wholly owned subsidiary is that, unlike branches, it has flexibility to open more than 12 branches in a year and can have presence in under-banked areas. These guidelines are to be reviewed to examine the possibility of allowing mergers/acquisitions of Indian banks.
In the light of the above, I conclude that India is a prospective location of our international expansion. It is a large financial centre and one of the fastest growing economies in the country. Good infrastructure is a precondition in deciding on a location for investment purposes. India has a focus on infrastructural development, which is evident from its latest union budget and allocation of funds. The federal nature of political system, lack of political unrest and the elaborate judicial system should help in smooth functioning of our business in India. The fast paced economic growth, focus on service sector, liberal trade policy, reliance on market principles and shift in focus to consumers are other key factors favourable for choosing India as a location for overseas presence. India is one of the most advanced nations in the category of developing countries. The learning and experience from our business presence in India will help us invest in other developing countries as well.
There are a few challenges that we must be aware of before investing in India. India is a land of diversity. Understanding the needs of such diverse customers is a challenge, but a thorough segmentation analysis and designing custom-made solutions of customers will help in winning the battle. Restrictions on FDI and granting branch licenses do exist as a major challenge, but recent steps taken by RBI displays its positive outlook towards foreign banks. RBI’s decision to allow foreign banks to make a presence in India through wholly owned subsidiaries is a welcome move. Friendly policies by RBI can be envisaged in future. Understanding the legalities in opening a wholly owned subsidiary is another challenge. This can be overcome by having a sound legal team with us.
As a manager, I strongly feel that opening an office in India would be a profitable proposition for us. Shareholders’ will be happy to be associated with a bank with international presence and see the increased profits. The existing customers, having base in India, will be delighted with better customised product offerings. The other profitable offerings can be non-fund based, fee based and off-balance-sheet products. The management will be happy about expanding their presence globally. I think a wholly owned subsidiary model appears to be best suited for establishing our presence in India.
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World Bank (2012). India: Foreign Trade Policy. Retrieved from: http://go.worldbank.org/RJEB2JGTC0