India-US bilateral relationship is at a tipping point.
The growing importance of India in the US world view is underscored by the fact that the US President, Mr Barack Obama, who is visiting India within two years of assuming charge.
Most US Presidents came a-visiting only towards the fag end of their tenure.
The high-power visit comes at a time when the Indian economy is witnessing high-octane growth (8.8 per cent in the first quarter of FY2010-11) amidst fragile and uneven nature of the economic recovery in advanced economies.
While talks on strategic co-operation in Defence, science and technology, aviation, energy, education, and nuclear spheres will be par for the course between the two countries, one area that should also engage the attention of the powers that be is the area of financial services, especially banking.
While US banks, busy as they are repairing their balance-sheets in the aftermath of the subprime mortgage crisis, would rather reorganise and consolidate their business at home than expand overseas, Indian banks are keen on expanding their presence/setting up a beachhead in the US.
The tightly regulated Indian banks are not deterred by the fact that the US economy was ravaged by the financial meltdown which was triggered in 2007. Instead they see business opportunities galore!
Consider the statistics: Indian Americans are the third largest Asian American ethnic group after Chinese Americans and Filipino Americans. Indian companies made 23 US-bound acquisitions of an aggregate value of over $3.8 billion in the first half of 2010 (according to IMaCS, this is twice the deal volume and eight times the deal value of 2009 first half transactions), thereby not only saving jobs during economic downturn but also creating them.
In 2009-10, India's exports to and imports from the US were $19.535 billion and $16.973 billion, respectively.
Despite Indian Americans contributing substantially to the US economy and Indian companies making acquisitions/ setting up operations there, Indian banks haven't made much headway in the US.
One can literally count the number of Indian banks in the US on the fingers of one hand — (State Bank of India, Bank of India, Bank of Baroda, ICICI Bank, and Andhra Bank — to be precise. All put together (barring Andhra Bank which only has a representative office in New Jersey), Indian banks account for just 0.4 per cent (or $12.282 billion) of the total $2933 billion worth of foreign banks' assets in the US as of July 30, 2010.
In the US, SBI has three branches, one representative office and a subsidiary (a chartered bank in California which has 8 branches). Bank of India has two branches while Bank of Baroda and ICICI Bank have just one branch each.
Wary of granting licence
The US Federal Reserve, apparently, is wary of granting foreign banks' licence to set up branches as it has concerns, among others, about the quality of supervision of these banks by the home country regulators, money laundering and terrorism financing. However, concerns on this count are misplaced with regard to India banks.
The US Fed must be well aware that its Indian counterpart — the Reserve Bank of India — is a conservative and dynamic regulator at the same time.
Constantly calibrating its monetary, regulatory and supervisory policies with the ever-changing domestic/global macroeconomic and microeconomic dynamics, the RBI has steered the Indian banking system so well that our banks never faced systemic shocks of the kind that has impacted US banks.
US policy-makers would do well to mull over a few points. India recently got recognition for its economic ascent, at a time when growth in developed markets such as the US, Europe and Japan is, at best, anaemic, by winning increased voting rights and a greater say at the IMF high table.
India has bolstered IMF's ability to lend to cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system with a contribution of about $13 billion.
FATF member
The country is now a member of the Financial Action Task Force (FATF).
The FATF membership comes with the responsibility to, among others, criminalise money laundering; implement customer due diligence (e.g. identity verification), record keeping and suspicious transaction reporting requirements for financial institutions and designated non-financial businesses and professions; establish a financial intelligence unit to receive and disseminate suspicious transaction reports; and cooperate internationally in investigating and prosecuting money laundering.
The country has in place a comprehensive anti-money laundering-combating the financing of terrorism laws and procedures to tackle them in place.
So, when Indian banks operate in an environment where the regulator has a hawk eye on the regulated and effective controls are in place to prevent money laundering and terrorism financing, there is no reason why Indian banks should not be given their due by allowing them the expand their presence in the US.
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