Foreign ownership in India's financial sector

Nobody could have missed the flurry of action on the part of foreign firms in India's financial sector. Foreign banks and investment banks are strengthening their presence. The top three investment banks- Merrill, Goldman and Morgan Stanley- now have a strong presence, either going it alone or with majority control. Lehman Brothers has set up shop recently. Bear Stearns is said to be exploring possibilities.

Foreign banks have gained exposures either in NBFCs or brokerage firms or both. They are clearly positioning themselves for 2009 when the RBI is due to review the restrictions on foreign bank expansion in India.

I dissect this phenomenon in my column in ET today and spell out its implications for domestic players (The shape of things to come).The worrying thing for Indian firms is that business related to cross-border activity is booming. Over time, this could end up getting large enough so that foreign firms can focus on this piece of the action without having to worry about the domestic market. In the next phase, they can attack the juicier segments of the domestic market.

I don't believe this will wipe out Indian firms. But my guess is that Indian firms in brokerage and investment banking will be marginalised and will end up being niche players in the domestic market. What happens in banking depends on how regulation unfolds. Here again, Indian banks will cede market share. But because the domestic market is under-penetrated, there will still be growth possibilities. The biggest concern at public sector banks is human resources. They are stuck with an ageing profile and have not cared to replenish their resources. Unless they can show drastic improvement in this area, the prospects are beginning to look bleak for them.