| India’s banking sector has recently had all the thrills and suspense of a Tom Cruise action thriller — with a successful rescue, foreign buyers, alleged accounting fraud and shareholder dissent. All this while the benchmark Nifty Bank index has added over $100 billion in value since March as local and foreign investors return, lured by beaten down valuations, lower interest rates and regulatory easing. But it’s important to remember these are all just subplots in a larger story of slowing growth. Let me explain. “Help me, help you.” Earlier this month, Japan’s Sumitomo Mitsui Banking Corporation agreed to buy a 20% stake in Yes Bank, marking the biggest foreign investment in an Indian bank. It also signals the successful completion of a rescue of the bad-loan-burdened bank that involved an equity bailout by several Indian lenders who are now exiting with a tidy profit. This week, Emirates NBD, among the UAE’s top bank groups, received preliminary approval to convert its existing branches in India to a wholly owned subsidiary – technically paving the way for Emirates NDB to participate as bidder in the long-pending sale of government and Life Insurance Corporation-owned IDBI Bank. While some have cheered the regulator for allowing the entry of more foreign banks, which promises longer-term capital, don’t read too much into it, said Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital Securities India. India’s comparatively restrictive bank ownership rules have turned accommodative only when no one else has the capital to spare — like with the 2016 investment by Toronto-based Fairfax to turn around Catholic Syrian Bank and Singapore-based DBS’s rescue merger with Lakshmi Vilas Bank in 2020. The Reserve Bank of India has always played “selective gatekeeper,” Ganapathy said. Besides, he expects no quick improvement in Yes Bank’s financial returns and no big change to the competitive intensity in the sector dominated by the top 5 banks such as State Bank of India, HDFC Bank and ICICI Bank. “I want the truth.” Just as the Yes Bank rescue concludes, IndusInd Bank is facing a widening loss as an accounting gap is now alleged to be fraud. And IDFC First Bank’s sixth capital-raise since 2020 has run into a governance controversy. Shareholders approved an $877 million investment by Warburg Pincus and Abu Dhabi Investment Authority, but voted against giving Warburg Pincus rights to appoint a director on the bank’s board and to board committees. Unlike last decade’s bad loan crisis that played out sector-wide, recent developments are “episodic” and a reminder of the need for continuous strengthening of governance processes, said Amit Tandon, founder and managing director of Institutional Investor Advisory Services (IiAS). The proxy firm recommended shareholders of IDFC First veto the resolution as it came with no minimum shareholding threshold and undermined board independence. “If India is to become a $5 trillion economy, we need many more banks, and larger banks,” Tandon added. “I feel the need… the need for speed.” Don’t let all this action fool you — it’s playing out in a rather stodgy growth environment. Bank credit growth has slowed in the past year from over 16% to less than 11% as demand for loans weakens in key sectors such as big business and unsecured consumer loans. The balance sheet health of the banking system today is the best in almost two decades, and new delinquencies in consumer loans and microfinance seem under control. But growth is the “biggest concern,” said Ganapathy. According to him, there’s little sign of improvement in corporate demand for bank loans, which amount to almost 50% of the overall portfolio. Relatively stronger growth in borrowing by small enterprises is on a much smaller base and stands threatened by Trump’s trade war. As for personal loans, consumption demand in urban India has yet to recover meaningfully. It’s a function of the economy. “We are stuck in a 6% GDP growth range, what else can we expect for banks,” Ganapathy said. Maybe boring works for banking. I’ll go to the cinema instead for a cliffhanger this weekend. | 
