Corporate Treasury, Banking & FX in India

Commentary

Is India the next China? 

In our recent Expert Perspectives series on India, [view it here], DBS Bank stated they believe it is. 

• Except for COVID, GDP growth is consistently above 5% [source: World Bank] 
• The government is making efforts to streamline the bureaucracy which has always been a challenge, and move it online.
• Manufacturing is being encouraged – India has long been a big provider of services. This requires an investment in infrastructure.
• Following COVID, there has been a big move towards a cashless society, with an advanced electronic banking system.
• There is comparatively little movement in FX: exchange controls remain in place. However, most transactions can be executed, including cross border loans and hedging – though cross border cash pooling is still very much forbidden. However, there is still a significant administrative burden.
• As part of the opening up, India has established a form of free trade zone, Gift City.

So – does this match our peers’ experiences?

We will get into the detail below: the full report [14 pages - available to premium subscribers] contains a lot of useful experiences. But, in big picture terms:

• All peers view India as a major source of growth: some are investing in manufacturing. While no-one is considering scaling back in China, India has generally been earmarked for the next big investment, where it has not already happened.
• Some peers have entities which are still losing money, while others are profitable and are generating a lot of cash. This is usually a sign that an economy is on a positive path.
• Comments about the bureaucracy were less positive. While some progress has clearly taken place, many prior approvals are still required, even for things like equity injections. These processes are manual, and lengthy.
• The banking system is generally good, but uneven: it is possible to do everything with international relationship banks. Most peers still use at least one local bank, but players like ICICI, State Bank of India and HDFC are large and sophisticated.
• The move towards a cashless society mostly affects the consumer: as in most countries, corporate banking is more uneven.
• Peers do cross border intercompany loans, but many prefer to use more local external funding than they would in other countries. Cash repatriation is possible through dividends (but there is a withholding tax cost), as well as equity reductions or external investment. But none of these is easy.
• Given this, there is some interest in Gift City, but none of the peers has taken the step yet.

More detail and anecdotes:

• New investment can be funded through cross border External Commercial Borrowings (ECBs). These can be intercompany loans, but they must have a minimum average tenor of 5 years, and require prior approval, as well as other restrictions.
• Given the restrictions, many peers choose to borrow locally, rather than use ECBs. This provides the additional benefit of avoiding the need to hedge the currency exposure – though hedging is possible.
• The tax structure remains complicated: even actions such as remitting new equity into the country involve taxes and an onerous (and lengthy) approval process. 
• Banks:
  • Most major foreign banks are present, and can handle most requirements. Peers use JPMorgan, Citi, HSBC, Deutsche Bank , DBS and BNP Paribas – but all are present.
  • However, some peers still use local banks for tax and payroll
  • The frustration with both local and international banks was that service levels and pricing can vary over time. Banks agree to low prices, but very quickly try to restore profitability. This happens everywhere, but it seems to be quicker and more brutal in India.
  • Equally, credit appetite, especially for services such as guarantees, varies over time, with sudden changes. Guarantees are used a lot, especially for government business: recent regulatory changes mean these now have to be issued against a local balance sheet.
  • As a result, peers use more banks than elsewhere: they need to be able to switch quickly.
  • Consumer transactions are mostly cashless. But there are anomalies: one peer uses small distributors and local suppliers, whose volumes exceed the limits for cashless retail transactions – so they have to use cash.
  • One peer felt that their international bank introduces new technology later than in other markets in Europe and Asia.
  • The Indian banks mentioned are highly regarded, though their electronic tools can contain oversights. 
    • Dual factor authentication is good. But when it involves sending an OTP and the system can only handle a local phone number, it makes life very complicated for remote treasury management. We are seeing this in other countries, too.
    • One local bank does not use SWIFT, and it uses the BIC for electronic transfers, not the IBAN. For a global treasury which has built its payments systems around IBANs, this can be a deal breaker.
    • MT940s are frequently missed or sent late.  
  • Though cross border pooling is not allowed, domestic sweeping and pooling are well established. Care needs to be taken with the pricing, to avoid potential tax issues.
• FX:
  • Goods import documentation still has to be provided, but this can now be digital.
  • Cross border services, including intercompany, royalties and management fees can all be paid – but the documentation and administration is onerous.
  • Competitive bidding of spot transactions and rolling hedges now works, and some are even using platforms such as 360T and Bloomberg. In the past, the documentation requirements made this impractical. Capital account transactions remain manual and documentation heavy.
  • Cash flow hedging is allowed: evidence has to be provided to RBI (the Reserve Bank of India) of ongoing import values. 
  • One peer is still not satisfied with the transparency – they have moved to pricing FX with a margin off an independent benchmark.
  • The peers use a mix of onshore hedging – usually viewed as having better pricing – and offshore hedging using NDFs, which do not require any documentation. 
  • It is hoped that the free trade zone in Gift City will bring these systems together – but that is not yet gaining traction amongst corporates.
  • Import and export invoices must still be settled within six months, or a maximum, in some cases, of one year. Beyond this, cross border settlement is not allowed, unless prior approval has been obtained.

Bottom line: India is the next India, not the next China. The two countries are very different, but they also have a lot in common: they are the only two countries in the world with populations of over one billion; their populations are very diverse; and, while both have huge resources, they have, in recent history, fallen short of their economic potential.

These two behemoths are growing rapidly. China started the process some time before India, primarily with manufacturing. India started later, primarily with services. It has now moved into a higher gear, and is diversifying into manufacturing and other areas. As it breaks down barriers to doing business, it is anxious to learn from the mistakes of others.

India remains a challenging place to do business. Our peers all agreed that the regulatory environment is improving, and that it is possible to implement modern treasury management processes. The high growth means it cannot be ignored. But no-one said it is easy.