Mumbai: These are not happy times for India’s banks.
Since April, the Reserve Bank of India has raised its policy rate by 125 basis points and banks’ cash reserve ratio (CRR), or the cash that commercial banks need to keep with the Indian central bank, by 150 basis points, making money dearer. One basis point is one-hundredth of a percentage point. Meanwhile, banks’ credit growth, margins and profitability are under pressure. The level of non-performing assets, or NPAs, too is rising. While India’s own public and private sector banks have been vocal about the impact, foreign banks operating in India have kept a relatively low profile in recent weeks. Mint spoke to the heads of three foreign banks on their strategies to tide over the tough time. All three have retail banking in India, which has been affected the most by RBI’s tight money policy. Edited excerpts:
In this high interest rate environment, how will you plan to manage your profitability and balance sheet growth?
Sanjay Nayar, CEO, Citigroup India:
It’s difficult to raise cost-effective funds, more so for foreign banks like us with few branches. Our strategy has not changed much. Our composition of earning does not entirely depend on lending and the major part of our earning comes from a combination of transaction banking, wealth management, capital market, investment banking, foreign exchange and derivatives business. All lending business put together accounts for 25-30% of the earnings. The real earnings are coming from other businesses and not lending.
As money gets dearer, we are becoming very selective to whom we give out loans. The basic driving principle to lend is that the individual has to be a Citi client either today or a client worthwhile for us tomorrow, where we get long-term sustainable revenues.
We also reprice loans. If the customer is a sticky one who uses multiple products, we are going slow on repricing, but for a single product client, the loan gets repriced immediately. The need for credit at these rates has come down. Small and medium enterprises and corporates are borrowing less.
Gunit Chadha, managing director and CEO, Deutsche Bank, India:
I am not in the camp that thinks that gloom and doom is here. The growth parameter still remains strong, though it has come off its highs. Is that growth as profitable as it was earlier? With operating margins under pressure, both clients and banks are becoming more sensitive towards strengthening risk and cost management systems.