India, Singapore still shy over banking

Since August last year, when the Indo-Singapore Comprehensive Economic Co-operation Agreement came into effect, trade between the two countries has increased by 40 per cent.

With over 1,900 Indian corporations setting shops there, Indian companies now make the fifth largest overseas group in Singapore.  However, one area where both Singapore and India have not been able to move ahead is the financial sector.

Over the past one year, two Indian banks - Bank of Baroda and UTI Bank - have been allowed to set up fresh operations in Singapore.  Similarly, DBS, the largest bank in Singapore, has been granted one more branch licence in India, taking its branch network to two.

However, these developments are mere token acknowledgement of the treaty by the two regulators. Neither the Reserve Bank of India nor the Monetary Authority of Singapore seems to be willing to open up the financial sector of their respective countries.

The RBI is the banking regulator in India, while the MAS regulates the entire financial sector in Singapore, including capital markets.

Under the treaty, both the governments have promised to open up the financial sector. Three Singapore banks are to be allowed to open 15 branches in India, while three Indian banks will be given the status of qualifying full bank, which can raise retail deposits and operate at 25 centres in Singapore, including both brick and mortar branches and ATMs.

However, not a single Indian bank has yet been allotted the QFB status as the MAS has been insisting on "ratings" of Indian banks as a precondition to offer the status even though the treaty does not stipulate that.

The MAS' official stance is that Singapore will offer up to three QFB licences to Indian banks that meet its "prudential requirements" and the CECA does not provide for automatic entry.

This is in conformity with the general principle under WTO and other free trade agreements. Singapore has 10 FTAs in force.

The RBI, on its part, does not seem to be very excited about allowing Singapore banks to open more branches. For instance, DBS wants to open many more branches in India, but the response from the regulator is not that encouraging. Two other Singapore Banks - United Overseas Bank and OCBC Bank - will be allowed entry in due course. Singapore has indeed issued banking licences to BoB and UTI Bank, but neither of them can take up full-fledged banking as BoB has been given licence to open an offshore bank, while UTI Bank has received a merchant banking licence.

There are 108 commercial banks in Singapore and out of these only five are local banks. However, unlike foreign banks operating in India, overseas banking entities in Singapore cannot undertake all banking activities. There are only six QFBs - Citibank NA, The Hong Kong and Shanghai Banking Corporation Ltd, BNP Paribas, ABN Amro Bank, Standard Chartered Bank and Malayan Banking Berhad.

Besides, there are 18 full banks, 35 wholesale banks and 55 offshore banks. Among Indian banks, UCO, Bank of India, Indian Overseas Bank and Indian Bank are full banks, while State Bank of India, ICICI Bank and BoB are offshore banks. Full banks offer the whole range of banking activities, but barring UCO (which has two branches), all other banks have one-branch presence. In contrast, a QFB can operate from 25 locations. So, it is important for three Indian banks to get the QFB status.

The impasse has further been intensified with the RBI not allowing Temasek Holding to raise its stake in ICICI Bank. Going by the ownership norms in private banks in India, no single entity is allowed to hold more than 10 per cent in any private bank.

However, since both Temasek and the Government of Singapore Investment Corporation are owned by the Singapore government, the RBI is treating them as a single entity and not allowing their combined stake to exceed 10 per cent.

This is despite the Singapore government's insistence that they are two separate investment vehicles and do not act in concert. Incidentally, Temasek also owns a 28 per cent stake in DBS, while the other two Singapore banks that want to enter India are originally family-held entities.

Till sometime ago, Temasek was holding 49 per cent in DBS, but that has dropped substantially and half of its equity stake is now being held by institutions. Infosys founder N R Narayana Murthy is on its board of directors.

Singapore is an important financial hub for the entire South-east Asia. Besides, it is also a strategic money centre (like London, Frankfurt, New York, Tokyo and London) and a centre for wealth management and private banking.

Yet, if the Indian banks are denied larger presence, they have nothing to lose in the short run as the retail banking market is overcrowded there. Similarly, Singapore banks cannot build a huge business in India overnight even though there is hardly any big Asian bank among the foreign banks operating in India.

However, in the medium term, both Singapore and India have huge potential as markets for banking activities. With the roadmap for "fuller convertibility" being spelt out, Singapore will play a very important role for Indians looking to buy assets overseas; it is cheaper than London and New York.

Besides, an increasing number of Indian corporations are looking for acquisitions in south-east Asia. Similarly, Singapore is keen to play a bigger role in roads, ports and special economic zones in India.

All these activities must be supported by banking activities. Commerce Minister Kamal Nath and his counterpart in Singapore Lim Hng Kiang alone cannot sort out the issues. It is high time both the regulators stopped posturing and forged a Comprehensive Banking Co-operation Agreement without further delay.