If Bharti had wanted an Indian bank to help it raise finance for the proposed Zain deal, Sunil Mittal would have had to fly out to London or New York.
He cannot do it from within India. The rules for Indian banks for financing mergers and acquisitions are quite simple. No bank can finance such a project with the money raised from within India. The sum has to be financed from the bank?s overseas operations.
It is, of course, nice to hear corporate affairs minister Salman Khurshid offering help to Bharti Airtel on behalf of the government. But other than a possible tax break, the government can do precious little even if it wants to nudge the banks?as, in many cases, their largest shareholder?to step in.
No Indian bank can come anywhere close to being able to offer something that can reasonably finance even a sub-billion-dollar deal. Take PNB, for example, the country?s second largest public sector bank. The bank has about $2 billion of business abroad. Assuming PNB?s share of the market abroad to be the same as it is here, that would make the total envelope of the Indian banking sector at just about $50 billion. So, to write a cheque for $10 billion, the entire banking sector would have to stand en masse as a single entity.
There is another good number to think about. Again, PNB has announced it is planning to capture business of $20 billion by the year 2013. This is from its entire domestic and foreign operations. If that is the projection of expansion for a bank like PNB, one can safely conclude that for any Indian bank to write a cheque for a decent-sized deal, the wait must continue longer into the future. Way beyond 2015, as it turns out.
There are two caveats to this story and they are the obvious ones. The first one involves a possible merger of some of the banks. The PNB figure, for instance, is predicated only on an organic expansion route. But this can be safely ruled out. The government does not have the nerve and the sector does not feel thrilled to discuss it. The other one involves removing the firewall between the domestic and foreign operations of Indian banks. But that would involve taking a call on flow of Indian and foreign currency across the border?basically, it is a question of capital account convertibility.
But does it really matter if an Indian bank does or does not stand party to a mega deal, except as a case of national pride? To get that perspective clear, it is good to study the role the Japan Bank for International Cooperation (JBIC) has played in the expansion of Japanese companies overseas. In India, JBIC is the key partner for the financial support Japanese companies need to build the Delhi-Mumbai Industrial Corridor. Just as multi-national manufacturing companies carry their own ancillary support companies with them wherever in the world they set up shop, the banking sector also operates on the principle of local support. Of course, the JBIC umbrella is mostly offered as term finance and not to support buyouts. It is interesting to note that JBIC has morphed from the Japan Exim Bank. Is there a case, therefore, for rethinking the role of the Indian Exim Bank, too?
In the absence of domestic comfort, Indian companies have built up the alternative defence mechanism of a stronger war chest?the corporate equivalent of making a larger down payment on buying a house or car. Obviously, it is a costlier route.
Local banking support is actually more crucial for smaller companies venturing abroad. And there is no doubt that Africa will be the centre for a larger number of mega business activities of Indian companies. Other than Wahid in Bangladesh, Bharti?s two large efforts have both happened on African soil.
But whether abroad or in India, it is obvious that without a substantial change in the rules of play in the financial sector or action on mergers of possible banks, the weight of Indian banks is unlikely to change for a very long time. The Indian banking sector is protected from the adverse effects of a global downturn, but in the process, it has developed the most asymmetric ratio between the size of the GDP and the coverage offered by it in comparison with similar countries. Privately the bosses of the bigger Indian banks agree that every year, ambitious Indian companies are quietly moving their business to the larger banks. They need the support the larger ones can give. This is also evidenced by the concentration of ATMs of the three largest banks versus the others in any Indian city. But this is also happening at the supra-national level, where companies planning to do big ticket deals abroad move to the foreign banks.
So if and when the Bharti-Zain deal comes through, it will remind us once again why the Indian banking sector has been glossed over.
?subhomoy.bhattacharjee@expressindia.com
