www.infosys.com/finacle The emerging market banks which were plagued by excess regulation and inefficiency a few decades back have finally come into their own and are here to stay.

1. The Rise and Rise of Emerging
Market Banks
Universal Banking Solution System Integration Consulting Business Process Outsourcing

2. Four years after the crisis broke, Greece and a contraction) of advanced country banks, many
few others are looking to survive, whereas of which still face multiple risks, implies that
countries like China are trying to use this quiet the relative importance of the former will quickly
period to take giant leaps forward and emerge grow. Yet, in most emerging markets, the banking
ahead of developed nations in the race for global industry remains immature. As a result, banking
supremacy. As the backbone of economy, the revenue as a percentage of GDP is still small,
financial sector will play a huge role in the offering great growth potential to incumbents and
dynamics of a likely shift in the world order in the new entrants alike, unlike in the stagnant and
twenty-first century. saturated Western markets.
While emerging nations have a host of problems Impact of Financial Crisis
to deal with, they have a lot going for them
when it comes to the financial sector. Emerging There are several reasons why the financial
market banks have done a number of sector in the developing world came through
fundamental things right, for instance, banks in the crisis with relatively little damage. Firstly,
China and India have participated in a number loan-to-deposit ratios are very low due to the net
of financial inclusion initiatives to take their saving position of this region. Developing world
services to some of the most backward regions banks have always gathered savings, in contrast
and previously untapped markets. Banks in the to Western banks, which borrowed heavily. This
BRIC nations have used their technological insulated emerging market banks from the
prowess to provide cost efficient platforms and collapse of the interbank market and preempted
mobile applications, which have helped to the need for substantial deleveraging. As a
catalyze industrial development. Regulatory result, these banks have been able to continue
bodies, i.e. Central Banks, have played a key role lending using a stable and often growing source
in ensuring that their banking sectors are well of deposit funding. Second, most emerging
protected and fundamentally strong. market banks already have high capital ratios
which limit pressures for balance sheet
The crisis in Western banking, still reverberating adjustments. In addition, the new capital rules
in Southern Europe, seems to have accelerated under Basel III are likely to be much less painful for
the shift in banking muscle from rich countries to these banks as they typically have less risky assets
the developing world. Banks in emerging and smaller investment banking businesses.
countries are now measuring up with those in
the developed world, when it comes to the real Role of State
thing, which is money. Not only are they well
capitalized and well-funded, they are also really Along with the status of emerging market banks,
big and growing. By profits, Tier-1 capital, the crisis has also transformed the role of the
dividends and market value, they now account state in banking. The main reason for the
for a quarter to half of the global banking industry. continuing growth in China, which had relaxed
China’s lenders head the list of banks by market its grip on the industry since a decade, was
value, and Brazilian and Russian banks are the government’s direction to continue lending
among the world’s top 25. At current growth during 2008 and 2009. In Brazil, India and
rates, India’s banks will catch up with the top global Russia, state-owned banks have seen a sharp
banks in a decade. improvement in their fortunes, gaining market
share at the expense of private banks.
Emerging market banks’ asset growth has
been impressive as well, with Chinese institutions Customer Expectations
topping the ranks. While emerging market
banks already grew faster than their advanced Banks all over the world are trying to reestablish
country counterparts prior to 2007, the financial customer confidence and spur organic growth.
crisis has further accelerated this trend. The Global banks are returning to core competencies
expected continued growth of emerging market and simplifying new products in order to adapt
banks and the likely stagnation (or even to a new era of customer expectations. Emerging
The Rise and Rise of Emerging
Market Banks

3. market banks are finding it easier to compete fragmented banking sectors), and across
with developed market banks by winning over borders. Large banks in China and other
local customers by providing greater access to emerging countries are likely to become
vital financial services. significant regional or global players over the
next 10 to 20 years through outward organic
According to Ernst & Young’s recently released and inorganic expansion.
global consumer banking survey 2011, titled “A
New Era of Customer Expectation”, the level of 4. Talent Acquisition:
customer trust in banks has fallen 55% in the
United States and 50% in Europe. But it has With Russian banks hiring investment bankers
dropped far less in key emerging markets such from London, Chinese banks recruiting
as India (down only 8%) and Brazil (off only 18%). American or European executives and Indian
banks seeking to attract staff with international
Opportunities for Emerging Market Banks: experience, developing world banks have
started to compete globally for talent. As they
1. Domestic Markets: internalize the knowledge of these employees,
so will their competitiveness in both domestic
Emerging market banks face a favorable and global markets increase.
situation in their domestic markets compared
to their advanced country peers. Firstly, their 5. Technology Adoption:
countries have large unbanked populations
promising growth opportunities. In contrast, Technology has made a major impact on the
the outlook for credit growth in advanced way banks process information. Financial
economies is bleak due to overall economic instruments, such as derivatives that enable
weakness and ongoing deleveraging among risk allocation based on appetite and ability
firms and households. Secondly, the are among the most significant innovations
macroeconomic outlook of emerging markets of modern banking. The use of such
is more positive. Unburdened by major instruments is not limited to developed market
sovereign debt problems or large current banks alone; thanks to their sophisticated IT
account deficits, most emerging markets are infrastructure, emerging market banks are
standing on a solid platform. Even though also able to transact in them. As a result, their
they will not be isolated from the problems in banking systems and financial markets are
Europe and the United States, the dependence positioned to move rapidly from a basic stage
of their banks on the West has diminished of development of risk management and
in recent years. other commercial banking functions to an
advanced one.
2. Retail Banking Sector:
In the same manner, the role of alternative
There is good potential for growth in the delivery channels, such as ATMs, debit cards,
retail banking sector in emerging markets, mobile, Internet and electronic banking, in
since mortgage and consumer credit lending developing commercial banking functions
is not as well developed as corporate and should not be underestimated. Given the
government lending (although both these poor penetration of these channels (with the
also offer considerable opportunities). Apart exception of ATMs), the vast majority of banks
from this, restructuring in emerging economies in emerging markets are focused on improving
should also create opportunities for private adoption. There is a big opportunity for them
equity firms in the short to medium term. to bridge the urban-rural digital divide by
reaching out to rural locations.
3. Mergers and Acquisitions:
International Expansion: Similar Difficulties
The rise of emerging economies is likely to
be associated with rapid growth of their key Developing world banks face exactly the same
banking players, as well as increased M&A set of problems as their western peers as they
activity, both within (by consolidation of try to expand abroad. Banks from advanced
The Rise and Rise of Emerging
Market Banks

4. countries have found that establishing a light future. Banks from emerging markets, being in a
presence in lots of countries is a great way to much better financial position, are likely to step
lose money. The same is likely to be true for into the void left by developed market banks,
emerging market banks, so the smarter firms are increasing their relative importance as foreign
trying to develop a competitive advantage that investors. The global financial system is therefore
they can export E.g. Indians can export the low likely to witness a shift towards emerging market
cost technology. banks domination. It will be interesting to see how
banks in emerging markets fuel the engine of
With a large part of funds yet to be allocated to growth with this shift in global power.
the unbanked population, most emerging market
banks face a credit crunch, hampering foreign References:
expansion. Also, regulators might oppose foreign
adventures as the use of domestic deposits to 1. Special report: Banking in emerging
finance a subsidiary overseas exposes the bank markets/The Economist/ 13 May 2010
to foreign exchange and counterparty risk.
2. Banking in 2050: How big will the emerging
Conclusion: markets get?/ Pricewaterhouse Coopers
3. The changing role of emerging-market
The emerging market banks which were plagued
banks/Author-Neeltje van Horen/ 25
by excess regulation and inefficiency a few
October 2011
decades back have finally come into their own
and are here to stay. With strong fundamentals 4. “A New Era of Customer Expectation”/Global
and regulatory mechanisms in place at these consumer banking survey by Ernst and
banks, the financial crisis has actually accelerated Young/2011
the pace at which these banks will overtake
their developed market peers. According to a 5. The Banking industry in the emerging market
report by PwC, the E7 banks (7 emerging economies: competition, consolidation and
countries which include the BRIC nations, systematic stability- an overview/ Authors-John
Indonesia, Turkey and Mexico) will overtake the Hawkins and Dubravko Mihaljek
G7 banks in assets by 2036, which is 10 years
ahead of its pre-crisis prediction. Emerging Author
market banks have set new rules in the Varun Chandra
business of banking, which developed market Associate Consultant
banks are trying to adjust to, making large Infosys
investments from their side unlikely in the near
The Rise and Rise of Emerging
Market Banks