The recent fall in the value of the Indian rupee since August has sparked a rise in the number of remittances by Indian expatriates in the Gulf. Trading at roughly 48 rupees to the U.S. dollar, India’s currency is at its lowest value in two years, hurt by credit downgrades tied to concerns about European debt. In the United Arab Emirates, which generates 13% of all of India’s remittances, a number of banks and money transfer houses have reported a 20% increase in remittances in September alone.

The rush by Indian workers abroad to capitalize on added spending power adds to a remittance flow that Indian banks operating in the Middle East were already reporting. Despite the ongoing turmoil in the region due to the Arab Spring, several banks are in fact actively looking to grow their footprints in the region. Yet, the same bankers see a mismatch between the rising remittances and declining work opportunities in the region for Indian workers, many of whom are returning to India.

Non-resident Indian (NRI) remittances, which flow mostly from the Middle East, the U.S. and Europe, are a big deal for Indian banks. India is the largest recipient of overseas remittances at US$55 billion in 2010, followed by China at US$51 billion, based on World Bank estimates. The Middle East has displaced the U.S. as the single largest contributor of NRI remittances with a share of more than 30%, according to a 2010 study by India’s central bank, the Reserve Bank of India. Total NRI deposits, or a subset of NRI remittances retained in Indian banks, were at US$51.6 billion as of March 31 this year, according to India’s central bank, the Reserve Bank of India.

Indian banks are bullish on their business prospects in the Middle East chiefly because of two factors: First, the uprisings have been largely in countries with small NRI populations (Tunisia, Egypt, Libya, Syria and Yemen), and Bahrain, besides minor protests elsewhere in the region. The largest NRI populations in the region are in the United Arab Emirates, Saudi Arabia, Bahrain and Qatar. Secondly, Indian banks haven’t so far sufficiently penetrated the Middle Eastern market, thanks to regulatory and other constraints, and are optimistic about the region’s long term economic prospects.

Remittances Remain Strong

Increased remittances from the Middle East at India’s biggest bank, the State Bank of India, are outweighing concerns about the conflicts hurting economic activity in the region, and by consequence, employment opportunities for NRIs. "Both trends are working in opposite directions," says Samir Bhattacharya, SBI’s general manager in charge of its NRI business. "The net impact for SBI is we have received higher remittances [in recent months]." SBI’s NRI remittances from the Middle East grew 18% to nearly Rs. 20,000 crores (US$4.5 billion) in its financial year ending March 2011 over the US$3.8 billion in the previous year.

That growth rate has since accelerated to approach 30% in 2011’s first quarter ending June for SBI, to about Rs. 5,000 crores (US$1.1 billion), compared to the same quarter in the previous year. About four-fifths of those remittances come from SBI’s own branches. The rest is routed through other banks, thanks to a money-transfer software package called SBI Express that enables them to collect remittances on SBI’s behalf.

NRI remittances are up also at other banks based in India’s Kerala state, one of the biggest suppliers of labor to the Middle East. P.P. Jayaprakash, chief manager (NRI) at the State Bank of Travancore says there has been "no significant deceleration" in the quantum of remittances to his bank. The bank has seen its monthly NRI remittances grow to Rs. 1,500 crores (US$335 million) this year, up from Rs. 1,400 crores (US$315 million) in each of the previous two years. Dhanlaxmi Bank, a relatively smaller player in that market that operates through a dozen exchange houses is also upbeat. It has doubled its Middle East remittances in recent years to its current run rate of Rs. 500 crores (US$110 million). It aims to double that by its financial year-end in March 2012, says Salil Datar, Dhanlaxmi’s head of branch banking and NRI business.

Flight to Safer Havens

Rajesh Chakrabarti, professor of international finance at the Indian School of Business in Hyderabad says it is "natural to expect remittances to India to slightly go up in times of conflict." Also, he feels most NRIs in the Middle East may have been remitting almost all their funds to India anyways, particularly at the lower end of the work force. "They would just keep their subsistence money there and send the rest to India," he says. Most of the roughly 1.5 million NRIs in the Middle East are semi-skilled and moderately-skilled workers, hailing principally from Kerala, Uttar Pradesh and Bihar states.

"India was and is a "safe haven" for Indian expatriates that work in the Gulf Countries," Jayaprakash says. "They don’t go there for permanent settlement, but earn to create assets in India for their life when they return." That, he explains, is unlike with the U.S., Europe or Asia Pacific countries where expatriates tend to settle down for life.

NRI remittances from the Middle East had been on a rising curve before the recent uprisings began, according to the RBI’s Monthly Bulletin of April 2010, which has the latest official trend analysis. Private remittances (excluding trade remittances) from the Middle East grew from US$9 billion in 2006-2007 to US$14.4 billion in 2008-2009, according to the report. That reveals the Middle East’s share of NRI remittances grew from 29% of Rs. 30,835 crores (US$6.9 billion) to 31% of Rs. 46,903 crores (US$10.5 billion) in the three years through 2008-2009. It continued that growth rate in the first half of 2009-2010, the latest period the RBI study covers.

"There were significant increases in NRI remittances from the Gulf region (Middle East), Europe and Africa whereas those from North America and East Asia declined," Bhattacharya notes of the RBI study’s findings. North America had for long been the biggest source of NRI remittances, but its share fell from 32% in 2006-2007 to below 30% by September 2009, the same RBI study revealed. He is also confident about the longer-term economic prospects of the region, even if the current unrest may have disrupted business activity and employment prospects for NRIs. In Qatar, for example, a slump in construction activity last year will be short-lived, thanks to the country winning the mandate to host the 2022 FIFA World Cup tournaments, Bhattacharya points out. Construction work has begun on at least five major stadia in the first phase of Qatar’s preparation for the World Cup. That means hundreds of jobs for Indian construction workers, carpenters, plumbers and laborers.

An Expanding Footprint

Encouraged by the strong remittance inflows, Indian banks want to grow their NRI services network. In mid-July, SBI opened its first office in Jeddah in Saudi Arabia, which has the biggest concentration of NRIs in the region. It earlier had no direct presence in Saudi Arabia, although it had tie-ups with three other banks — Arab National Bank, al-Raji Bank and National Commercial Bank. Earlier this year, the bank also forged a partnership with the al-Almoudi Exchange House in that country. (Exchange houses are peculiar to the Middle East where bank branch licenses are hard to secure; they facilitate NRI remittances through banks.) SBI has also expanded its network of specialized NRI branches in India, taking its strength from 13 to 45 in the past 18 months. These branches have so-called "relationship managers" who pursue and cater to high net worth investors. With all those moves, Bhattacharya hopes to take SBI’s market share of Gulf remittances from 48% currently to 60% in the foreseeable future.

At Dhanlaxmi Bank, Datar wants to expand beyond the dozen exchange houses that currently route Middle Eastern remittances to his bank. The bank recently tied up with Qatar’s Doha Bank and plans a similar arrangement with Saudi Arabia’s al-Raji Bank. Also, it has made arrangements with exchange houses for its own staff to work closely on business development, and get leads to high net worth NRIs in the region.

The optimism is tempered by several concerns, including a possible decline in job opportunities for NRIs in the Middle East. K. C. Zachariah, a former World Bank demographer who is now an honorary fellow at the Centre for Development Studies in Thiruvananthapuram, Kerala, has for 16 years studied international migration, especially from the Gulf region. "My own judgment is future migration to the Gulf region will be smaller," says the veteran of four sample surveys of migration, including one underway that is due in January 2012. He sees a growing shortfall of workers available and willing to migrate from India to the Middle East. He doesn’t have to go far to find reasons: He says he pays Rs. 450 a day (US$10) to day laborers to cut grass outside his house. "In some sectors we pay more wages in Kerala than in the Gulf," he says. He says India’s state-funded job guarantee program that offers doles to the unemployed has pushed up wages, while the country’s booming economy has created lots of new jobs.

Also, NRIs are getting priced out of the Middle Eastern job market by migrants from the Philippines and Bangladesh, besides other countries, says K. V. Shamsudheen, chairman of the Pravasi Bandhu Welfare Trust. The Kerala-based organization guides guide NRIs on financial discipline and planning. "Indians are facing a competitive threat in the Gulf region. This is exacerbated by the demand [in some Middle Eastern countries] for a higher share for locals in job openings. This can affect the growth in remittances, going forward."

The Pravasi Bandhu trust conducts regular awareness classes for NRIs on the need to save and invest for a stable future. Shamsudheen, a Kerala native who has spent 40 years in the Middle East, says many don’t save enough. "I have seen thousands of people returning for permanent settlement to India. Within one or two years, they come back because they had not put aside sufficient financial resources for their families." These days, he advises those aspiring for a Gulf job to stay back in India and avoid taking pricey loans from unscrupulous lenders that paint "rosy pictures of salaries and jobs," only to discover later that they were defrauded.

Bhattacharya says SBI’s presence in the market acts as a confidence booster to NRIs and their families back in India. "They are vulnerable and given wrong advice by private money remitters," he says. "Our branches try to percolate down even to villages and educate them." ISB’s Chakrabarti strongly feels the Indian government ought to better disseminate information about labor rights and provide assurances of security to Indian workers in the Middle East, many of whom are poorly educated and gullible.

An Empty Tree

All those factors weigh in heavily as Indian banks contemplate expansion to the Middle East. Foremost is the worry that the recent strong trend in remittances may reflect the lifetime savings of NRIs, and not just their monthly earnings. Dhanlaxmi’s Datar feels NRIs may be sending more money to India because of unrest in the Middle East. "[NRIs] may have to flee at a shorter notice," he says. "They would move to India the savings they accumulated for a rainy day."

Datar finds other worrisome trends for banks. He notes that NRIs these days have diversified their investments into property, stock markets and gold, all of which would negatively impact bank deposit growth. What’s more, he notices a distinct deceleration in NRI remittances taking the form of bank deposits in recent years. NRI deposits in India grew US$4 billion in 2010-2011 to US$52 billion, but that growth was higher in the previous year at US$6 billion, he says, citing World Bank data.

Amid all those concerns, one big question keeps India’s biggest keeper of NRI funds up at night. SBI’s Bhattacharya worries about how much of the recent remittances are of returning NRIs transferring all their monies to India, drying up the permanent source. "If you pick up all the fruits, the tree becomes empty," he says ominously. He hopes he is wrong to harbor such fears, and his expansion bets in the Middle East will pay off.