There was no smooth surge in middle class prosperity for foreign businesses to tap into because of the Indian economy was mismanaged, argues Debashis Basu.
Among the many arrogant quips and replies given by foreign banks immediately following the securities scam of 1992 was: "If you keep your front door unlocked, you are likely to be burgled."
This comment came from a cowboy banker from Citibank. He was justifying how foreign banks had hoodwinked Indian public sector banks in the opaque government securities market to make obscene profits.
While their treasury operations were unknown outside the small, shadowy world of the Indian debt market, Citibank too was a dominant retail financial services brand in the early 1990s, setting the pace for retail finance -- from credit cards to consumer loans.
ICICI Bank was still a development-finance institution, Kotak Mahindra Bank and Axis Bank did not exist, and HDFC Bank, set up in 1994, was headed by a former Citibanker.
Some 30 years later, in March 2023, the same Citi sold its retail business to Axis Bank and exited the Indian retail banking business.
It was not an isolated case. Over the years, the presence of foreign banks in India has been reduced to nothing.
The largest foreign bank in India is Standard Chartered Bank, which has only 100 branches in 42 cities. HSBC has just 26 branches.
The 38-odd other foreign banks operating in India have an insignificant presence.
HDFC Bank alone has more than 8,000 branches.
The biggest global banks like JP Morgan Chase, Bank of America, Mitsubishi UFJ, and BNP Paribas are either not present in India or have nothing much on the ground.
The top banks in India are State Bank of India, Axis Bank, ICICI Bank, HDFC Bank, and Kotak Mahindra Bank.
It is a similar story in mutual funds. Among the top 10 mutual funds, there are a few foreign joint venture partners, but they have little role.
Most funds are entirely Indian owned. The only foreign asset management company among the top 10 is Nippon India.
The largest US mutual funds are not in India.
Morgan Stanley and Fidelity have walked out of India and Templeton is struggling to grow.
The story is slightly different in insurance, where many foreign companies are joint venture partners because the business is a bit technical.
But these too are controlled by Indian management.
Life Insurance Corporation of India, a Government of India company, still rules the life cover business.
All this is a far cry from the early 1990s, when circumspect Indian policymakers attempted to strike a balance between domestic interests, on the one hand, and the diplomatic push of US trade representatives, on the other, to smooth the entry of US foreign financial into India.
Reams of media columns were written on how an aspirational middle class of India (estimated at 200 million at that time) prospering through economic liberalisation, would need retail loans, insurance, and -- thanks to India's high savings rate -- investment products like mutual funds.
And, who better to sell these to Indians than US companies, which claimed to have the best products and investment expertise? Multiple rounds of discussion at the World Trade Organization focused on opening emerging markets to services from developed nations (read Wall Street); left-leaning politicians and academics howled about the possibility of neo-colonialism, brought about by neo-liberalism.
What happened was exactly the opposite.
In 1993-1994, when six private mutual funds were licensed, many of them had foreign partners.
Subsequently, more foreign mutual funds entered India, but hardly any of them survived in their original form.
The string of early and later entrants that have exited include Pioneer, BlackRock, Alliance Capital, Sun F&C, Morgan Stanley, Jardine Fleming, JP Morgan, and Goldman Sachs.
In contrast, the survival rate among Indian funds, some with passive foreign partners, is very high (JM Financial, DSP, Aditya Birla, Shriram, etc.)
Millions of 'proud Indians; would see this trend as conclusive evidence of the greatness of Indian entrepreneurs and quickly extrapolate this into the future ('India's century').
While Indian entrepreneurs and managers have indeed shown tremendous talent and execution skills, the 'Quit India' policy of foreign financial companies hasn't happened by design but by default.
Quite frankly, all the assumptions made in the mid-90s about the Indian middle class have turned out to be wrong.
There was no smooth surge in middle class prosperity for foreign businesses to tap into because the Indian economy continued to be mismanaged.
Productivity remained poor, corruption and taxes stayed high, and crony capitalism undermined infrastructure growth in the mid-2000s, resulting in bad loans of Rs 20 trillion in PSBs.
A surge in prosperity between 2005 and 2008 was purely due to a massive global boom across all geographies; it drove up the prices of many assets and created a short boom in financial services.
But the global financial crisis (GFC) hit India in 2008 and we were again reduced to the same struggle for the next decade.
Foreign firms, badly weakened by the GFC, got fed up and distracted, and began to exit.
Indian companies had no such option.
They slogged it out, bided their time, and steadily gained market share.
Hence, when disruptive opportunities like taking customers on board digitally happened, domestic banks were better placed to scale up.
Similarly, when the stock markets took off post-Covid, domestic mutual funds and broking firms grew rapidly.
While the financial sector threw up clear winners (Indians) and losers (foreigners), note the same has not happened in other sectors.
For example, foreign companies in personal products have not quit. Their powerful presence continues.
Debashis Basu is editor of moneylife.in and a trustee of the Moneylife Foundation
Feature Presentation: Aslam Hunani/Rediff.com
