'India Is Capital-Starved, PE Funds Must Invest In Banking System': Experts Decode Shriram-MUFG Deal

Amid Japan's increasing bets to buy a piece of India's financial institutions, industry experts have hailed the latest landmark deal of the Mitsubishi UFJ Financial Group (MUFG) eyeing a 20% stake by investing nearly Rs 40,000 crore or $4.5 billion in Shriram Finance Ltd, announced on Friday, Dec. 19.

In an exclusive interaction with NDTV Profit, Shanti Ekambaram, the former Deputy MD of Kotak Mahindra Bank has pegged it as a 'vote of confidence in India's growth story'. The deal marks the largest strategic investment by a foreign lender in India's non-banking financial company (NBFC) sector.

Ekambaram also believes that India needs further growth capital in the booming financial services sector for tapping into bigger opportunities. In this regard, Sonia Dasgupta, MD & CEO of Investment Banking, JM Financial Services highlighted that domestic private equity (PE) funds must also invest in the banking space to contribute for India's economic boost.

Discussing the landmark Shriram-MUFG deal, Ekambaram said that the stake deal is primarily a growth capital for the NBFC as it is a primary infusion into the company. The Kotak Mahindra Bank veteran explained that Japanese banks always look for long-term capital investment deals.

"If India wants to reach the $7 trillion economy goal by 2047, then the financial services will be at the center of it as raw material is money. Foreign capital is a confidence in India. The financial sector is at the core of any economy over the willingness for long term investment," she said.

The banker illustrated State Bank of India's share price as an example of the rising interest of foreign investors in the last 18 months, who have taken the stake in the PSU stock right up to the permitted amount.

"The Reserve Bank of India has brought in some new regulations in the last one year, which have made things easier for banks and NBFCs. The RBI is willing to work with them towards finally looking at credit growth and bring in more money into economy. The government has brought in new fiscal measures and is willing to bring in capital," she explained.

According to Ekambaram, India is a capital-starved country but the outlook is positive. "Which country in the world has over 8% GDP growth for two quarters? So, India has growth in the economy, changing demographics and hunger for consumption. Hence, the growth opportunities are possibly sustained for the medium-term," said the Kotak bank veteran.

"The Indian financial sector has not seen consolidation for a long time, while many other sectors have. So, maybe this is just the beginning, but I think capital infusion ensures growth and vote of confidence," she added.

According to Sonia Dasgupta of JM Financials, India's PE funds are now also competing head-on with all strategic interests and very often, outbidding them in acquiring stakes. "PE funds are now having long-term orientations to good franchises in India. If foreign strategics come in, that always remains as a great option, over and above the depth that the Indian capital market has allowed them to make exits through block," she said.

So, its likely a win-win situation, according to Dasgupta, who believes that this instills a lot more confidence of the PE universe to get into more transactions with control and contribute towards the sector's growth.

The investment banking expert also said that banks need to lend more as India is at crossroads where the economy really needs to move up on the GDP rankings. "This requires a lot of investment which means the banks have to take a long-term view and invest. We're already seeing the credit deposit ratio in the sector reaching nearly 80%," she highlighted.

"If foreign strategics are allowed to invest, then its a fair ask for the Indian industrial houses to also be given a platform to invest, to be able to build the country shoulder-to-shoulder with foreign strategics," said Dasgupta.

She concluded that it's also a fair time to allow some of the deep-pocketed Indian industrial houses to build the country via the banking system.