Despite the high tax rates wiping out a large part of their gains, India is fast emerging as one of the most profitable markets for foreign banks post the global financial crisis.Compared to other emerging markets, accelerated growth in the domestic economy provided greater business opportunities to foreign banks here, resulting in higher profitability, said analysts and bankers.
"Post the financial meltdown, India has emerged as the hottest destination for foreign banks. The incremental returns India offers over the US market have increased from 0.3 per cent in 2006 to 11.4 per cent in 2009," said Monish Shah, director, Deloitte, a global audit and consultancy firm.
"Apart from stable growth with relatively less volatility, India offers a matured regulatory framework and a sizeable and addressable market from the point of view of foreign banks. These factors have increased its attractiveness," he added.
Earlier this month, Hong Kong and Shanghai Banking Corporation said India became its third-most profitable market in the Asia-Pacific, following record profits in 2010. The bank's pre-tax profit surged 82 per cent year-on-year to $679 million in the year gone by.
Similarly, for Standard Chartered, India was the most profitable market globally in 2010. The year saw the lender's operating profit topping $1 billion for the second consecutive year.
"The growth in Indian economy and the diversity of our income streams and product lines gave us the robustness to grow. We believe these (factors) will help us grow in 2011 as well," said Neeraj Swaroop, StanChart's regional chief executive for India and South Asia.
For Deutsche Bank also, India was one of the most profitable markets in the Asia-Pacific.
"India is one of our leading franchises in the Asia Pacific zone," said the bank's official spokesperson. He, however, did not share further details as the bank is yet to disclose its earnings for this financial year.
High tax incidence, however, continues to play spoilsport.
According to analysts, foreign banks in India are taxed at an effective rate of 42.02 per cent. In contrast, domestic banks are taxed at 32.45 per cent. They attribute the higher tax incidence to the fact that foreign banks opt to conduct business through a branch model here.
While the Reserve Bank of India allows foreign banks to operate through branches as well as subsidiaries, the 34 foreign banks currently operating in India operate through the branch model.
In January, the central bank released a discussion paper on the presence of foreign banks' in the country. While the paper discusses the pros and cons of both the models, RBI has indicated its preference for the subsidiary model.
"We need to understand the implications of this discussion paper better. There are certain things that need to be fixed, like issues regarding capital gains tax," said StanChart's Swaroop.
Some bankers said that foreign banks would not be keen to set up a subsidiary in India unless the effective tax rates came down.
"If that (tax rate) is not resolved, I don't think foreign banks will be interested in the subsidiary model," a top official of a global bank said on condition of anonymity.
Banks sent their comments and feedback on RBI's discussion paper on March 7. The regulator will now come up with guidelines regarding the presence of foreign banks in India.
Analysts, however, said while tax incidence remained a concern, foreign banks would continue investing in India on hopes of high returns.
"While a higher tax incidence indeed acts as dampener for foreign banks, it is only one of the factors foreign banks would consider for evaluating investment attractiveness," said Deloitte's Shah.
