Backed by the government of India, Gujarat International Finance Tec-City (GIFT City) is gaining momentum, with a number of Indian lenders having opened a branch there and international banks mulling over licenses.
The attraction is understandable. GIFT City offers a more benign regulatory environment than elsewhere in the country, with banks getting exemptions from withholding tax and a lower minimum alternate tax.
In addition, domestic lenders are permitted to book foreign currency loans to Indian companies, their subsidiaries and overseas joint ventures through their GIFT City branches — something they could not do through their other domestic units.
The benefits are plentiful but for lenders shouldn't expect a big boost in business any time soon. Along with competition from well-established financial hubs overseas, GIFT City also has to contend with several homegrown problems.
For starters, GIFT City is supposed to benefit banks with no functions overseas as they can avoid regulatory hassles by setting up shop in the finance hub and still grow their international balance sheet by lending to overseas borrowers and the international arms of Indian companies.
But it is worth noting that Indian banks that have just begun to bulk up their foreign currency loan book will take time to reach a point where they can underwrite billion or multi-billion dollar transactions.
It is not just a question of signing big cheques but the challenges and risks that arise from distributing such a deal to overseas lenders. It is about possessing and using every type of tool to gear up and de-risk a transaction — a toolbox that smaller Indian lenders will take time to build.
Admittedly, mid-cap Indian borrowers that do not enjoy deep relationships with a foreign bank investor base have a new funding avenue as they can now tap GIFT City banks for their foreign currency needs. But the larger firms — the bread-and-butter of dollar loan supply from India — already enjoy those banking relationships and with pricing on their loans trending low thanks to abundant liquidity, they are unlikely to change tack anytime soon.
Reach
GIFT City, on the other hand, would be a gateway to business from mostly Indian names.
When it comes to something as practical as organising a roadshow, London or Hong Kong are more likely to be priorities because of the huge numbers of investors already based there.
A consistent regulatory framework and a clear path for recovery and insolvency in its home country are essentials for a global financial centre, and in these respects, GIFT City has got off to a good start. But international investors’ past experiences in dealing with the complex legal processes in India means they are unlikely to jump into the game at an early stage.
GIFT City is a step in the right direction. But there is still some way to go before it can be counted as a truly global centre for finance.