Financial Services

Entering the Indian

fnancial services market*
Entering the Indian nancia| services market PricewaterhouseCoopers 1
Indias soaring economic growth and the resulting
surge in demand for both corporate and consumer
fnancial services are attracting ever greater interest
from international groups.
Several international groups are already well established in
India; others are seeking out entry routes in niche areas such
as credit cards and private banking.
Further openings are set to follow under government plans
to eliminate the remaining restrictions on foreign ownership
in the banking sector.
This fyer produced by PricewaterhouseCoopers
1
examines
the opportunities opening up in Indian fnancial services and
how prospective entrants can move into the market.
Introduction
1.
PricewaterhouseCoopers refers to the network of member frms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
2 Entering the Indian nancia| services market PricewaterhouseCoopers
India already has more middle-class people on a
purchasing power parity basis than the entire population
of the US and a consumer credit market that is growing
by more than 40% per annum.
2
Another 100 million
people will have joined the middle class by 2010.
A number of overseas fnancial institutions including
HSBC, Citigroup, Standard Chartered and ABN Amro
have developed strong distribution networks and business
relationships in India, either through direct offerings,
subsidiaries or joint ventures (JVs).
Among Indias leading fnancial services brands are
the joint ventures set up by Prudential, GE Money,
Merrill Lynch and Morgan Stanley.
Niche growth markets such as private banking and
acquisition fnance have offered a point of entry for a
number of leading international groups. Deutsche Bank
and Barclays Bank are among the groups that are
increasingly active in both segments.
Goldman Sachs is an example of an institution that has
taken its Indian growth strategy to the next stage by
selling its joint venture stakes and looking to develop
larger scale onshore operations in areas such as real
estate and asset management.
3
Although regulatory restrictions on branch opening and
acquisition are still in place, foreign holdings in Indian
banks and other fnancial institutions continue to increase
rapidly. This includes multiple foreign stakes in a number
of leading institutions. For example, ICICI Bank, Indias
second largest bank, is now 74% foreign-owned.
4
The Reserve Bank of Indias (RBI) road map for the
presence of foreign banks in India outlines plans for
easing and eventually eliminating restrictions on foreign
ownership after 2009. However, the opening up of the
insurance market to allow full foreign ownership may
take longer.
5
Plans for fuller currency convertibility could provide a
further boost for foreign investment by opening up greater
access to Indias fnancial markets and providing
increased scope for the development of the sector.

Overview
2
Reserve Bank of Indias Report on Trends and Progress of Banking in India (2005/06).
3
Economic Times, 16.3.06.
4
Bloomberg and ICICI Bank Annual Report & Accounts (2006-2007)
5
Reserve Bank of Indias Report on Trends and Progress of Banking in India (2004/05).
Entering the Indian nancia| services market PricewaterhouseCoopers 3
Economic expansion is creating an increasingly large
and aspirant consumer class.
The Indian economy is marching ahead. GDP is expanding
by more than 8% per year and the country is now the fourth
largest economy in the world on a purchasing power parity
(PPP) basis and ninth on a market exchange rates (MER)
basis. This rapid expansion is expected to continue as
growth in the service and high technology manufacturing
sectors accelerates.
Indias economic transformation is fuelling the expansion of
a middle class that already numbers more than 350 million
people and could exceed 500 million by 2010.
6
The relative
youth of Indias consumers (69% of the population is under
35) means that they are often keener to spend than to save.
7

For example, car sales rose by 23% in 2006 to exceed one
million (80% sold through fnance packages) and mobile
phone connections doubled to reach 140 million.
Financial institutions have been quick to take advantage of
the corresponding surge in demand for consumer credit
which is growing by more than 40% per annum. Early mover
foreign entrants include GE Money, which markets Indias
leading credit card in a joint venture with the State Bank of
India (SBI). The development of the credit market has been
aided by debt recovery legislation (tribunals were set up by
the Government in 1993 to speed up recovery, followed by
tougher enforcement laws in 2002).
Yet, as with any emerging economy, 21st-century
corporations and aspirational urban consumers co-exist
with an older, under-developed India that cannot be
transformed overnight. Although investment is beginning to
pick up, roads, telecommunications and other aspects of
the infrastructure can often be diffcult. Businesses can also
face signifcant bureaucracy and complex tax structures.
The government has opened many areas of commerce to
full foreign ownership since beginning the move away from
a command economy in the early 1990s (India joined the
World Trade Organisation in 1995). However, fnance is one
of a number of sectors where the government has continued
to exert considerable control and protection, both through
tight regulation and as a signifcant shareholder in its own
right. Although India avoided the fnancial crises that
affected other Asian markets in 1997, concerns about a
similar setback continue to underpin Indian regulators
generally cautious approach to liberalisation.
The combined state and central government defcit is 9%
of GDP (three times higher than the euro-zone growth and
stability ceiling). Servicing this debt still takes up more than
a third of banking resources, which may detract institutions
from commercial lending and other sources of retail/
corporate business. However, the government no longer
obliges banks to hold a quota of government bonds and
banks government security holdings are gradually falling
as a result.
6
More than 360 million Indian people have incomes above the National Council for Applied Economic Researchs (NCAER) threshold for middle class of more than $2,000 per person per annum.
90 million earn between $4,500 and $22,000 per annum. Their purchasing power is much higher than it would appear in dollar terms ($3,000 per annum is seen as the threshold for buying a car in
India, for example). The NCAER expects the middle class to reach 560 million people by 2010. (The Great India Market, 9.8.05).
7
Indias gross national savings rate (earnings over spending) is 26%, which, while higher than the US, is low by Asias generally cautious standards half of Chinas, for example.
(Wall Street Journal, 3.1.06).
Market environment
Figure 1 Key facts
Sources: Indian Government, UNICEF, CIA World Factbook, Economist Intelligence Unit
Population 1.1 billion
GDP (2006) $3.7 trillion (PPP)
$796 billion (MER)
Per capita GDP $3,700 (PPP)
Infation 6.2%
Unemployment 7.8%
Education
Adult literacy 58%
Universities 226
Engineering/tech colleges 426
Figure 2 Comparative growth estimates
Source: Economist Intelligence Unit
2006 2007 2008
(forecast) (forecast)
India 9.2% 8.5% 8%
China 10.5% 9.5% 9%
Russia 6.7% 6.0% 5.5%
Brazil 2.9% 3.4% 3.5%
4 Entering the Indian nancia| services market PricewaterhouseCoopers
The soaring demand for fnancial services is attracting
ever increasing foreign investment.
Banking
Demand
Demand for banking services is growing signifcantly, albeit
in a country where less than half of households have a bank
account. Deposits rose by 18% and bank credit grew by
30% in 2005/06. It is in the retail sector that the surge
in demand is most marked. Retail lending rose by 47%
year-on-year up to June 2006. Housing loans grew by more
than 50% and loans to the retail commercial sector rose by
more than 100%. While corporate lending still predominates,
these retail segments now account for 7.7% and 6% of the
overall lending market respectively. At around 30% of GDP,
consumer credit in India is still low in comparison to other
Asian markets, suggesting that there is considerable room
for further growth (consumer credit/GDP is more than 100%
in Singapore, Taiwan and Malaysia, for example).
The credit card market is growing by around 35% per
annum, albeit from a low starting point (receivables reached
$6 billion in 2006). The value of card-based and retail
electronic payments rose from $1.38 billion in 2001/02 to
more than $51.85 billion in 2004/05 (though still some way
short of the UK fgure of around $500 billion per annum).
Urban/rura|
The twin-speed development of Indias urban and rural
economies is refected in what remains a relatively
bifurcated banking market. While only 7% of Indias 68,000
branches are located in towns and cities, they account for
36% of deposits and 48% of retail credit. The corporate
and urban retail markets have tended to be the primary
focus of international institutions, in particular. However,
opportunities for developing business outside the main
urban areas are likely to open up as living standards and
consumer demand increase. A number of groups are
developing multi-channel and segment strategies to bring
a wider range of services to rural consumers.
Structure
India has around 100 private, public and foreign-owned
banks that together make up the Reserve Bank of Indias
(RBI) top tier regulatory category of scheduled commercial
banks. At 10% or more, average return on equity (RoE)
among these leading institutions (see Figure 3) is higher than
many other emerging Asian markets.
No institution apart from the SBI has been able to establish
more than a 10% share of the retail credit market. This
would suggest that there are still considerable openings for
foreign institutions seeking to establish a presence in this
fast growth market. Possible joint venture partners could
include some of the smaller players that account for nearly
50% of market, who may be keen to attract the expertise
and capital backing of a foreign institution.
The Indian government owns or holds a majority stake in
19 of the scheduled commercial banks, including the SBI,
which is by far the largest in terms of business and branch
network. The middle layer of the pyramid is made up of
some 200 regional rural banks. At the grassroots are dozens
of credit co-operatives, which tend to serve the poorer
sections of the community. Overall, the government owns
banks that hold around three-quarters of the countrys
banking assets.
Openings in fnancial services
RoE (per cent)
25.0
20.0
15.0
10.0
5.0
0.0
05-06 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05
Figure 3 Return on equity of schedu|ed commercia| banks
Source: Reserve Bank of India
Entering the Indian nancia| services market PricewaterhouseCoopers 5
As Figure 4 highlights, the new private sector banks
(NPSBs) formed over the past ten years tend to be more
proftable than their older or publicly-owned counterparts.
The NPSBs have generally made more effective use of
technology and are less encumbered by the restrictive
labour practices that are common in the public sector.
This may make the NPSBs more appealing as prospective
investment/acquisition targets.
Foreign investment
There are 58 foreign banks operating in India, of which
31 are trading through 245 licensed branch operations.
Standard Chartered has the most branches, followed
by HSBC and Citigroup. Around 80% of foreign-owned
branches are located in metropolitan areas. As Figure 4
highlights, foreign banks are the best performers in the
sector. Their concentration in affuent areas, corporate
banking and offshore fnancing naturally tends to deliver
a greater value-added return.
Organic growth of international banks has been inhibited
by the RBIs restriction on the number of branch openings
to 12 per annum. Banks can also set up wholly owned
subsidiaries, though the qualifcation criteria, including
reserves, are exacting. The fnal option is an investment
of up to 74% in an existing bank, though there is for the
time being at least a 10% ceiling on voting rights.
Despite the restrictions on voting rights, foreign holdings
in some of Indias most commercially attractive fnancial
institutions continue to increase, either through the foreign
institutional investor route or global depository receipts/
direct investment. For instance, multiple international
investors hold 74% of the shares in the ICICI Bank
8
and
69% of Centurion Bank,
9
two of the countrys fastest-
growing NPSBs. At the same time, longstanding players
like HSBC, Citigroup, Deutsche Bank, ABN Amro and
Standard Chartered continue to expand their activities and
market share. In 2006, Citigroup extended its foothold in
the rapidly developing Indian mortgage market by increasing
its stake in the Housing Development Finance Corporation
(HDFC) (see Figure 8 on page 8).
GE Moneys joint venture with the SBI, which was established
in 1998, presents a model of successful niche market
penetration and development. The partnership has helped
to create Indias market-leading credit card. It combines the
advantages of SBIs market presence and strength as a
trusted brand with GE Moneys global expertise in technology,
business processes and innovative product development.
Joint ventures enable international groups to establish
all-important local knowledge, local teams and client
relationships within this culturally diverse marketplace.
This initial investment can then provide a platform for further
development. For example, Merrill Lynch has invested a
further $500 million in its joint venture with DSP, a leading
fund management and investment banking corporation.
10
Goldman Sachs has taken its growth strategy a stage further
by selling its stakes in its joint ventures with the Kotak
Mahindra Bank and looking to develop larger scale
operations encompassing securities, investment banking,
private equity, real estate and asset management.
11
Barclays
Bank is investing more than $200 million in the development
of its investment and corporate banking business in India.
12

This includes targeting Indian SMEs, a segment until now
largely untapped by international groups. In January 2007,
Barclays announced that it would be moving into retail
banking in India by offering credit cards and personal loans.
13
Net profits to assets ratio (per cent)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
05-06 20-01 01-02 02-03 03-04 04-05
Public sector banks Old private sector banks
New private sector banks Foreign banks
Scheduled commercial bank
Figure 4 Bank protabi|ity by segment
Source: Reserve Bank of India
8
As of 31 March 2006, ICICIs shareholding included 26.8% held through American Depository Receipts and 47.1% held by foreign institutional investors and non-resident Indians
(ICICI Bank Annual Report & Accounts 2006-2007).
9
India News Online, 15.5.06
10
DSP Merrill Lynch media release, 7.12.05.
11
Economic Times, 16.3.06.
12
Business Standard, 22.3.06.
13
Financial Times, 29.1.07.
6 Entering the Indian nancia| services market PricewaterhouseCoopers
India opens up
All this groundwork is likely to prove invaluable as India
approaches a decisive stage of market liberalisation through
the RBIs two-phased road map for the presence of foreign
banks in India. In the frst phase, which runs up to 2009,
banks may be able to open more than 12 branches per
annum, though the location will still be at the discretion of
the RBI. The RBI may also sanction more foreign investment
in existing banks, though targets are likely to be limited to
banks identifed by the Reserve Bank for restructuring.
14
The RBI does not appear to have a frm benchmark for
institutions that it considers to be in need of restructuring
and decisions are likely to be reached on a case-by-case
basis. However, the requirement for more capital is likely
to be a key criterion. Rabobank took a 20% stake in the
Yes Bank prior to its IPO in 2003 and retained a 15% stake
following the fotation. The investment has paid off, with the
initial share price having nearly doubled by June 2006 as
Yes established a strong presence in the technology SME
sector.
15
However, some better capitalised institutions may
remain off limits for the time being. It would appear that the
RBIs initial preference would be to encourage investment in
regional banks. Many of these would certainly provide a
foothold in the market, though time and resources may be
required to realise a return.
The key watershed is set to be 2009, when the road map
indicates that the remaining restrictions on foreign control,
including the 10% ceiling on voting rights, will be eliminated.
It should be noted that the fnal go-ahead may be subject to
political considerations, as 2009 is an election year.
A further boost for both foreign and domestic investment
could come with the proposed move to full convertibility
of the Rupee. This would extend convertibility to the capital
account, which would open up greater international access
to investment in Indias debt markets and fnancial services
institutions, and in turn provide a catalyst for the further
development of the sector.
14
RBI Report on Trends and Progress of Banking in India (2004/05).
15
Asia Money, 12.6.06.
Entering the Indian nancia| services market PricewaterhouseCoopers 7
Insurance
Uptake of insurance is low in India, even by comparison
to banking. Only one in eight Indians holds some form
of insurance. Just 8% of the population has life insurance
in a market that makes up only 2.3% of GDP.
16
Comparisons
with other leading emerging markets (see Figure 5) underline
the under-development and the consequent potential for
growth within Indian insurance. From this low base, the Indian
insurance sector has been expanding by an average of 25%
per annum since being opened up to private companies in
1999.
16
The life market grew by 146% in 2006. The non-life
market grew by 24% in 2006.
16
Life insurance is closely linked to mortgages, take-up of
which has until recently been very low in India. However,
further acceleration in the growth of the life insurance
market could follow Indias increasing urbanisation and
rapid recent expansion of its mortgage market.
An increasingly popular route to market is bancassurance,
especially through joint ventures, which combine the
advantages of specialist products with trusted relationships
with branch representatives. Examples include ICICI
Lombard, Indias number one private general insurance
company, which is a joint venture between ICICI Bank and
the US-based Fairfax Financial Holdings. Similarly, the
leading private life insurer is a joint venture between ICICI
Bank and UK-based Prudential (see Figure 6).
The popularity of bancassurance is helping to fuel the
increase in the proportion of the insurance market held by
privately owned companies. Private insurers now hold
around a quarter of the market and their presence is growing
across all major life and non-life segments. While insurance
remains a predominantly state-controlled market, the JVs
mentioned above highlight the increasing presence of foreign
investors. The government has proposed an increase in the
ceiling for foreign holdings in insurance ventures from 26%
to 49%, although no frm date has been announced.
17
Figure 5 Comparative insurance premiums (2005}
Source: Sigma Research
Market
(million)
Per capita Life
per capita
Non-life
per capita
India $25,024 $22.70 $18.30 $4.40
China $60,131 $46.30 $30.50 $15.80
Russia $17,521 $122.80 $6.30 $116.50
Brazil $23,955 $128.90 $56.80 $72.10
Figure 6 Leading private |ife insurers
Source: Insurance Regulatory and Development Authority Report (2005-06)
(ranked by business in force)* Rank
ICICI Prudential 1
Bajaj Allianz 2
Max New York Life 3
HDFC Standard Life 4
Birla Sun Life Insurance 5
* As of 31.3.06
16
Insurance Regulatory and Development Authority Journal, February 2007.
17
Investment Commission of India, 16.7.07.
8 Entering the Indian nancia| services market PricewaterhouseCoopers
Asset and wealth management
Assets under management reached $68 billion in August
2006, a year-on-year rise of more than 50%. As Figure 7
highlights, the leading players include a number of foreign/
private joint ventures. With assets under management only
accounting for around 12% of bank deposits, the potential
for growth is evident.
Wealth management is a particular focus of international
interest. Barclays Bank, one of the groups which is
extending its onshore wealth management capabilities
in India, estimates that this segment will grow by 15%
per year over the next three years.
18
NBFCs
Non-banking fnancial companies (NBFCs) are another
important segment of an increasingly convergent sector.
From their origins in project fnancing they have now
expanded their services into a variety of areas ranging from
equipment leasing and hire purchase to high-interest
investment plans. Some NBFCs are being allowed to extend
their services into banking areas such as credit cards.
Mergers and acquisitions
The competitive and regulatory pressures for consolidation
are leading to a rapid increase in M&A activity, with more
than $1.3 billion worth of deals announced in the Indian
fnancial services sector in 2006 (6.8% of total deal value).
It is signifcant that four of the fve largest investments
involved international groups (see Figure 8). Such activity is
likely to accelerate still further as international groups seek
to establish footholds and jockey for position ahead of the
planned opening up of the market in 2009.
Basel II is likely to provide a further catalyst for consolidation.
In an interview with the Financial Times in July 2005,
Hoshang Sinor, Chief Executive of the Indian Banking
Association, said that the impact of Basel II and other
pressures could reduce the number of scheduled commercial
banks from around 100 to 25 by 2009.
19
Further down the
pyramid, consolidation of the co-operative sector is gathering
pace, with the RBI keen to encourage larger co-operative
banks to take over their smaller and weaker counterparts.
Figure 7 Assets under management (May 2007} of |eading
fund managers (equity} based on an exchange rate
of $1 = Rs 42
Source: Association of Mutual Funds in India
Reliance Capital Asset Management $14,081 million
Prudential ICICI Asset Management $12,072 million
UTI Asset Management $9,540 million
HDFC Asset Management $8,606 million
Franklin Templeton Asset Management (India) $6,256 million
Figure 8 Most va|uab|e M&A dea|s in 2005
Source: Dealtracker
Target Acquirer Nature of transaction Value $ million
HDFC Citigroup Increasing stake to 12.68% 671
India Bulls Financial Services Farallon Capital Not disclosed 143
IL & FS Abu Dhabi Investment Authority Acquiring 10% stake 100
IDFC Barclays Bank Acquiring 4.7% stake 84
Sangli Bank ICICI bank Merger 67
FS deal value in 2006 of $1.374 billion, making up 6.8% of Indian deals by value and 8.3% by volume
18
Private Banker International, 27.6.06.
19
Financial Times, 27.7.05.
Entering the Indian nancia| services market PricewaterhouseCoopers 9
10 Entering the Indian nancia| services market PricewaterhouseCoopers
Realising the market potential of Indian fnancial services
is likely to require an investment in time as well as capital.
Demand for fnancial services in India is taking off.
International fnancial institutions are playing an increasing
role in the expansion of Indias large corporations. A vast
SME market remains largely untapped. On the retail side,
India already has more middle-class people on a purchasing
power parity basis than the entire population of the US and
a consumer credit market that is growing by more than 40%
per annum. By 2010, another 100 million people will have
joined this increasingly credit-hungry consumer class.
The competitive demands for enhanced service, product
choice/quality and risk/capital management are creating
further openings for international fnancial services groups,
either directly or through joint ventures. Although some of
the initial investments by international groups have been
long-term strategic plays on the development and
restructuring of the market, the revenue potential is now
beginning to come to fruition. Early movers are also well-
positioned to take advantage of the opening up of the
market to full foreign ownership.
Although the door is open to new entrants they face
competition from established players, ranging from the
increasingly nimble and adept NPSBs, such as ICICI and
Centurion, to global groups with more than a centurys
experience of this market, such as Citigroup. Some new
entrants may therefore initially look to niche markets such
as private banking before seeking to establish broader
mass market operations. Others may seek to build on
the platform of offshore service centres in India to provide
internet and telephone services within the country itself.
Another possible option would be the acquisition of under-
capitalised institutions that are coming up for sale as part
of the government-inspired drive for consolidation.
Some institutions may prefer to wait until restrictions on
foreign ownership are removed, which under current plans
should take place in 2009. The potential purchase targets
are then likely to include some of the larger and better
capitalised banks and NBFCs that have up until now been
largely shielded from foreign acquisition by government
protection. However, is it wise to wait that long? Some
of the most attractive targets are already in foreign hands,
albeit in multiple ownership, and the purchase price of those
that remain is mounting.
Future developments
Entering the Indian nancia| services market PricewaterhouseCoopers 11
12 Entering the Indian nancia| services market PricewaterhouseCoopers
Contacts
If you would like to discuss any of the issues raised in this paper in more detail, please speak with your usual contact
at PricewaterhouseCoopers or call one of the following:
Nick Page (Editor}
Partner, Transaction Services
PricewaterhouseCoopers (UK)
nick.r.page@uk.pwc.com
44 20 7213 1442
Jairaj Purandare (Author}
Country Leader, Financial Services
PricewaterhouseCoopers (India)
jairaj.purandare@in.pwc.com
91 22 6669 1400
Deepak Kapoor (Author}
Managing Partner
PricewaterhouseCoopers (India)
deepak.kapoor@in.pwc.com
91 124 4620502
Ashwani Puri
Leader, Advisory Services
PricewaterhouseCoopers (India)
ashwani.puri@in.pwc.com
91 124 4620501
Amrish Shah
Executive Director, Mergers & Acquisitions (Tax)
PricewaterhouseCoopers (India)
amrish.shah@in.pwc.com
91 22 6669 1390
Bima| Tanna
Executive Director, Transaction Services
PricewaterhouseCoopers (India)
bimal.tanna@in.pwc.com
91 22 6669 1555
Gautam Mehra
Executive Director, Financial Services (Tax)
PricewaterhouseCoopers (India)
gautam.mehra@in.pwc.com
91 22 6669 1320
Nick Page is a partner in PricewaterhouseCoopers Transaction Services Financial Services team in London. The authors
are senior members of PricewaterhouseCoopers Financial Services, Transaction Services and Advisory teams in India.
PricewaterhouseCoopers is a leading advisor to the fnancial services industry in India and has played a prominent role in
some of the most important deals in the sector. The team includes more than 40 fnancial services transaction specialists,
fve of them partners, who are primarily focused on banking and investment management, with expertise in insurance, real
estate and leasing. M&A, valuation and due diligence, and non-performing loans advice is supported by specialists in key
areas such as tax.
Subjects covered in the Financial Services
M&A fyer series
Entering the Gulf fnancial services market
Entering the fnancial services market in Taiwan
Entering the Chinese investment management industry
European banking consolidation

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