India and China, the world’s two massive emerging dynamos, are developing their banking sectors in different ways. With their huge populations and expanding economies, both are destined to build significant financial sectors in the decades to come, but the key questions revolve around how, what and when; how will they go about it, what structures will be created and when it will happen?
In The Banker’s latest Top 1000 world banks listing (see page 177) both countries are in their global banking infancy with India’s 24 banks accounting for 0.9% of aggregate Tier 1 capital and China’s 25 banks accounting for 4.8% of the Top 1000 total. With a combined total of more than a third of the world’s population, banking in both countries has a long way to go to match global comparisons. So what is being done?
Foreigner wary
In Karina’s Kolumn (see page 26) India’s central bank governor, Dr Y V Reddy, supports tight controls both over the economy and the level of foreign bank participation. Foreign banks are constrained, with few exceptions, to buy no more than 5% of domestic banks or a larger stake if shared, with these guidelines being reviewed in 2009.
Nevertheless, foreign bank branches account for 7% of banking assets. In short, foreign banks have limited access to the Indian market and Indian officials are intent on maintaining tight controls.
In contrast, since entry to the World Trade Organisation in 2001, the Chinese have encouraged foreigners to buy in and, between 2001 and 2005, foreigners invested about $20.9bn in Chinese financial institutions, including $17.6bn in 2005 alone. The cap for foreign investors is 25%, and 20% for a single investor, with suggestions that this cap may be eased by year’s end to attract investors into the smaller Chinese banks.
But while the Chinese are opening up to foreign capital and expertise and clearly realise the advantages they can bring, China is far from selling out. Foreign banks account for less than 2% of Chinese assets, compared with more than 70% in Poland, and the recent foreign participations in the big public sector banks look set to be a long-term winner for both.
China’s entrepreneurial approach appears to squeeze as much out of the foreigners as possible while India’s bureaucratic approach suggests the Indians believe they can do it almost all themselves in their own slow time frame. In an increasingly global environment, India’s go-it-alone style may get there eventually but, unlike China, it seems destined to miss out on a lot of growth opportunities on the way.
