PDF: 2962 pages, 5.2 MB - Bay Area Council Economic Institute

Global Reach
convenience); as of early 2007, 22 million credit cards had been issued in India, compared to 70
million debit cards.
Credit card penetration is highest among affluent households (28%); among middle-class
households, penetration for both is still in the single digits; and in many rural areas it is still
nonexistent. Nationwide, personal consumption by credit card averages around 1%, versus 3%
for China, 6% for the Asia-Pacific region and 8.6% worldwide.
Consumers spent only an average $37 per month each on their credit cards in 2006–07, yet total
credit card transactions in 2006–07 ($7.4 billion) were five times that of debit card purchases.
Consumers primarily used debit cards to access ATM machines, which grew in number to nearly
21,000 in 2006, a six-fold increase over 2001. Merchant point-of-sale (POS) terminals for processing
credit and debit cards grew ten-fold during 2001–06, to more than 335,000, suggesting
strong growth to come in debit and credit transactions.
Grappling with Consolidation
Freeing PSBs to scale up and compete, streamlining industrywide regulation, and fully opening
the banking market to foreign competition would address most existing market distortions. Consolidation
and vertical integration among Indian banks is key to their future competitiveness, yet
of 71 banking mergers that have taken place in India between 1961 and 2004, 55 took place prior
to 1991, largely in response to government pressure on large, profitable banks to absorb smaller,
ailing ones. With a few exceptions—the HDFC Bank takeover of Times Bank in 2000, or the
rollup of SCICI, Anagram Finance, ITC Classic and Bank of Madura into ICICI Bank, concluding
in 2001—most post-liberalization mergers have also been horizontal, RBI-initiated rescues.
Banks have so far been unwilling to take on mergers aimed at scale or vertical integration in the
absence of a streamlined approval process (deals are still subject to RBI and Parliament review
and modification); an end to directed lending; relaxation of labor rules on hiring, layoffs and
redeployment; and a consistent nationwide regulatory framework.
Cross-Border Banking
It is in this context that foreign banks are looking to expand their participation in a fast-growing
and underserved mega-market, while meeting the needs of a relatively affluent non-resident
Indian (NRI) customer base in their home countries. At the same time, major Indian banks are
testing the waters in the U.S., looking to serve the 2.5 million NRIs here.
Citigroup has had an India presence since 1902, and American Express has offered travel-related
financial services there since 1921. Both have established brands and service networks in spite of
Indian government policies that place significant restrictions on foreign bank operations: $25
million capitalization for a foreign bank’s first branch; a restrictive RBI foreign branch licensing
scheme with non-transparent quotas (19 foreign branches approved in 2007–08, many in less
profitable rural locations, compared to 913 for SBI alone); directed lending and asset allocation
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