Japan’s big banks are tired of looking for new opportunities to expand their operations in their own country. India’s fast growing economy, good consumption and increasing credit demand have opened new doors for Japanese banks. Today the situation is that India’s banking and financial sector has become the favorite destination of Japan’s biggest banks. The biggest example of this changing era is the investment of Rs 40,000 crore by MUFG (Mitsubishi UFJ Financial Group) in the Indian company Shriram Finance.
This deal becomes special because after this MUFG will get 20 percent stake in India’s second largest non-banking finance company (NBFC). This is no ordinary investment, but an indication of the serious approach that Japanese banks are taking towards long-term growth in developing markets like India. Japan’s domestic banking market has expanded almost as much as it could. Due to decreasing population there, the number of new customers is also being limited. In such a situation, a young and fast growing market like India is naturally attracting them.
MUFG had tried to invest earlier also
In recent times, the interest of Japanese banks in India has increased rapidly. Mizuho acquired Avendus, Daiwa Securities Group made its third investment in Ambit, and Sumitomo Mitsui Banking Corporation spent $1.6 billion to buy a 20 percent stake in Yes Bank in May. All these deals show that Japan now wants to establish a strong base in India.
This is also not the first attempt of MUFG. Last year, it had tried to invest $2 billion in HDB Financial Services, the NBFC unit of HDFC Bank, which was not successful. But now the deal with Shriram Finance has become an ideal option for him. The company has deep experience in retail lending and vehicle finance and will provide MUFG an opportunity to directly enter India’s emerging credit market. Earlier, MUFG had also invested $338.5 million in DMI Finance and later increased its stake to 20 percent. It is clear that instead of making a new beginning in India, Japan is adopting the model of partnership with local companies.
Why is Japan making inroads into India?
India today offers what was not possible in Japan, such as rising incomes, strong consumption, a rapidly formalizing economy and large-scale infrastructure development. At the same time, the banking industry in Japan is already almost completely expanded and megabanks like MUFG, SMBC and Mizuho have covered almost every consumer and corporate. Due to population decline and aging society, loan demand there is also weak.
Even though the Bank of Japan started increasing rates last year after a long period of zero interest rates, it did not change the basic equation of the banking sector. Profits are limited, consumer demand is weak and many regional banks are having to resort to mergers for their survival due to declining local population.
Under these circumstances, expansion abroad has become a compulsion for Japanese banks. In emerging markets they see growth and scale that are no longer available in their home markets. India stands at the forefront of these emerging countries. The growing middle-class population here, the growth of the MSME sector and the spread of digital financial services have permanently strengthened credit demand.
Banks around the world are turning towards India
Interestingly, Japanese banks are entering India at a time when big investors from all over the world are already investing huge capital in India’s banking sector. According to Bloomberg data, this year only deals worth about $15 billion have been made in banking and financial institutions. Many international players like Emirates NBD of Dubai, Blackstone of America, Zurich Insurance of Switzerland and SMBC are making big investments. Recently Blackstone has invested 705 million dollars and taken 9.9 percent stake in Federal Bank.
