Banking On India's Continued Growth (IBN)

By Eugene Bukoveczky | October 09, 2007 AAA

While U.S. and European banks continue to be troubled with the fallout resulting from the subprime meltdown, banks and banking regulators in India appear to struggling with a completely different problem - rapid growth. (To learn more, check out The Stages Of Industry Growth.)

India's Lending Boom
India's booming economy is creating rising levels of affluence, which in turn is expanding Indian banks' opportunities for lending. Over the last three years, the number of credit cards in circulation in India has risen rapidly. Fueling this growing demand for consumer credit is the emergence of an aspirational middle-class in India that has quickly adopted the spending habits of their western counterparts.

Demand for funds by the Indian corporate sector is also expected to surge over the next few years. Strong expansion plans by Indian businesses, some of whom are now venturing into high-profile overseas acquisitions. One example is india-based Tata Motors' (NYSE:TTM) potential acquisition of Ford Motor Company's (NYSE:F) Jaguar luxury auto unit. Overall, moves like these are expected to boost the the prospective corporate financing requirements of Indian corporations in the coming years. A surge in infrastructure investment is also expected to boost the demand for bank credit further on the subcontinent.

ICICI Positioning For Growth
As India's second-largest bank, ICICI Bank (NYSE:IBN) has been cashing in on India's lending boom so far. Profit grew by 22% during the company's fiscal 2007 (ended March 31), and so far this year profits are up another 25% on a year-over-year basis. Retail loan growth rates, which are rising at more than 30% annually, are the main drivers of profit growth, with 65% of the loan book comprised of retail lending. ICICI is also India's largest issuer of credit cards, with 5.2 million outstanding.

Recently, ICICI raised $5 billion through an Indian market and U.S. ADR equity issue in order to finance further lending growth. It has also been pushing the Indian regulatory authorities to level the playing field by allowing for the formation of bank holding companies.

Converting to a holding company would potentially unlock shareholder value for ICICI, which now has a host of subsidiaries involved in life insurance, general insurance and asset management businesses. Unfortunately, the way the decision has been handled by Indian regulators and the Indian government is somewhat disappointing. While India's Insurance Regulatory and Development Authority gave its approval without any problem, the Indian government initially said no. It then subsequently gave its approval subject to the approval of the Reserve Bank of India (RBI), India's equivalent of the Federal Reserve Board. The RBI, for its part, appears to have dodged making an immediate decision by issuing a discussion paper outlining the need for a proper legal framework on such holding companies and called for public consultation.

Regulatory Delay Should Only Be Temporary
The RBI's stalling tactics on this issue sound very much of the "old" way of doing business in India; However, these bureaucratic traditions are now quickly giving way to more market-driven imperatives. That's why I believe this regulatory roadblock will only be temporary in nature. India's rapid economic growth is not only transforming the economic status of the average Indian, but also bringing about much needed changes in India's government institutions. Both these trends promise to continue benefiting domestic banks like ICICI.

For related reading, check out Pros And Cons Of Offshore Investing.

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