Mumbai: With just a few months left for the Reserve Bank of India, or RBI, to decide on whether to open the country’s financial sector to foreign banks, there is
little consensus among bankers from some of the largest public, private and foreign banks on the much anticipated issue.
Expert view: (top, from left) Panelists K.C. Chakrabarty, chairman of Punjab National Bank; Sanjay Nayar, CEO of Citigroup India; K.V. Kamath, managing director and CEO of ICICI Bank; Tamal Bandyopadhyay, Mint’s Mumbai bureau chief; O.P. Bhatt, chairman and managing director of State Bank of India; Neeraj Swaroop, CEO of Standard Chartered Bank; and Gunit Chadha, managing director and CEO of Deutsche Bank at the Mint Annual Banking Conclave held in front of an invitation-only audience in Mumbai on Monday; (below) Nayar, Chakrabarty, Chadha, Kamath and Bhatt share a light moment before the conclave begins; (above) Chadha, Kamath and other panelists head for the discussion table. While Chadha insisted that foreign banks can indeed participate in financial inclusion in a much more cost-efficient manner if they are allowed to enter semi-urban and even rural areas, Bhatt warned that India’s development goals using public sector banks will be hampered if foreign banks are allowed to enter the country en masse and significantly ramp up competition. Abhijit Bhatlekar / Mint
At Mint’s fifth Clarity Through Debate series, top executives of State Bank of India, or SBI, ICICI Bank Ltd, Punjab National Bank, Citigroup, Standard Chartered Bank and Deutsche Bank AG discussed “Should the Country Open Up the Financial Sector?”.
The panelists at the Mint Debate, held on Monday in front of an invitation-only audience here, were, however, clear that more Indian companies shouldn’t be allowed into the country’s banking sector and that the best route to allow the foreign banks in India to expand would be through setting up of a wholly owned subsidiary.
But the current guidelines about such subsidiaries of foreign banks are not clear and need to be modified before foreign banks can consider that route, said several of the bank CEOs participating in the Mint Debate moderated by Tamal Bandyopadhyay, who writes the Monday Banker’s Trust column and is also Mint’s Mumbai bureau chief.
The Indian banks’ charge was led by K.V. Kamath, managing director and CEO, ICICI Bank, who said India is a far more open country than most developed countries when it came to bank licences, and that the same level of reciprocity given to a foreign bank in India is never awarded in most countries to Indian banks looking to expand overseas.
Kamath said that out of the 18 countries that ICICI Bank operates in, 16 — including several developed ones — aren’t as welcoming as India has been towards foreign banks. “We need to ask this question, ‘why are these markets closed, why should we open?’” he said. “If they want to access our market, they should allow us to access their market as well.”
Sanjay Nayar, CEO of Citigroup India, countered, saying that reciprocity depends upon the bilateral arrangements and also pointed out that there isn’t a level playing field for the foreign banks in India. He did agree that while some banking regulator guidelines are indeed tilted towards Indian banks, other regulations do favour foreign banks as well.
Supporting Nayar’s argument, Neeraj Swaroop of Standard Chartered Bank also pointed out that licensing issues have put hurdles in the way of foreign banks venturing even into semi-urban areas.
O.P. Bhatt, chairman and managing director of SBI, the country’s largest bank, acknowledged the contribution of foreign banks in the country, noting that they had brought significant product innovation to Indian banking and introduced competition that made the banking system more efficient.
He noted that despite constraints in expanding within India, foreign banks had a big role to play in Indian companies making overseas acquisitions by providing the bulk of financing and advisory services. However, he warned that India’s development goals using public sector banks will be hampered if foreign banks are allowed to enter the country en masse and significantly ramp up competition. “The public sector banks’ ability to do it (serve the backward class) will be decimated by open and blunt competition from foreign banks,” warned Bhatt.
K.C. Chakrabarty, chairman of Punjab National Bank, said financial sector reforms should emphasize efficient financial inclusion, noting that public sector banks are already leaders in that arena. He said he was doubtful about what foreign banks can do for such financial inclusion goals.
Gunit Chadha, managing director and CEO India of Deutsche Bank, insisted that foreign banks can indeed participate in financial inclusion in a much more cost-efficient manner if they are allowed to enter semi-urban and even rural areas.
He also questioned the priority sector definition of RBI, and argued that instead of exports and small and medium enterprises, national priorities ought to be issues such as education and health care, which can be helped by foreign banks funding non-government organizations and marketing intermediaries.
As for allowing new domestic competition for banks, Chakrabarty noted that “unless the corporate governance practices of the corporates improve and their basic business model, separation between the ownership and management, are established appropriately, they should not be allowed”.
Kamath supported Chakrabarty’s view, saying that many corporate groups have failed in successfully running banks in the past.
Chakrabarty was unequivocal in saying that the financial sector should not be opened for the next five years at least to unfettered competition, though the foreign bank CEOs said it should start, albeit slowly, next year.
Market access remains key factor
WHY SHOULD WE OPEN UP?
In the 18 countries where we are operating, I can say one is certainly more open than us. May be one more. Sixteen others, including some well-known names,
are completely closed compared with India. We need to ask this question: why are these markets closed? Why should we open up? I think we need to take the debate to that level before we come to other issues such as efficiency... We need market access as much as those countries need market access at our end.
PROTECTING NATIONAL INTEREST
The basic issue is very simple. Most countries have their own national interest. They will allow the foreign banks to come in if that is in their own interest, and most of the time when there is distress... The playing field here is much more open than anywhere else... Will foreign banks come with $500 billion (Rs23.3 trillion) capital to fund our infrastructure? I don’t think so.
Managing director and CEO, ICICI Bank Ltd
WE ARE A PROTECTED INDUSTRY
I think our financial services industry suffers from the fact that we have no new
banks coming in. There, competition is not increasing. We are a protected industry which has allowed a relative amount of inefficiencies to flourish. We need to have competition — whether it is foreign banks or whether it is private sector, we need to have more competition. That is how I define opening up of the financial sector.
WE ARE WILLING TO GO TO SEMI-URBAN POCKETS
We are urban-centric foreign banks because that is how the (branch) licensing is. At Standard Chartered, we have written to the Reserve Bank of India that we are keen to open 100 branches in semi-urban areas. We are willing to go out of cities.
CEO, India, Standard Chartered Bank
I FAVOUR FOREIGN BANKS
Do I favour foreign banks in India? The answer is yes. In the last decade, the Indian banking system has become far more dynamic and far more
customer-centric. It has got a far greater range of products and services than what it had, ever. It has happened largely because of foreign banks and private sector banks.
In the last two years alone, nearly 500 foreign companies have been acquired by Indian companies and about $50 billion was spent in these mergers and acquisitions. The bulk of the money has come from foreign banks.
NO OPEN SESAME PLEASE
You don’t open the floodgates. You decide some parameters and depending on their branch network or net worth, allow foreign banks to open more branches. It should not be open sesame. There could be restrictions, but I think more and more of them should be allowed (to have a larger play in India).
Chairman and managing director, State Bank of India
REFORMS ARE EXTREMELY SLOW
I think the key thing is that the opening up has to be viewed in the context of India’s growth. In respect to infrastructure, consolidation and financial inclusion, the
Indian banking system today is clearly underperforming the opportunity... We are highly undercapitalized... Whether it is foreign banks or Indian banks, I think financial sector reforms have been extremely slow than what it should have to take care of these three big requirements. It’s been far slower than what this country requires.
SOME COUNTRIES ARE OPEN, SOME ARE NOT
The way the regulations are laid, it is not a level playing field. I would not like to comment on reciprocity. It is between the governments and bilateral discussions... The UK has nine ICICI Bank branches — so some countries are very open. And some countries, like the US, are quite difficult to get through because they have their idiosyncrasies... I am not supporting that.
CEO, Citigroup India
NO LEVEL PLAYING FIELD
The society does not give me level playing field. On 24 and 25 September, there
will be a strike by trade unions. The private and foreign banks do not have trade unions. If I charge my customer Rs5 more, he goes right up to Parliament. He may be paying Rs500 more (at private and foreign banks), but does not protest. Where is the level playing field?
I AM TREATED AS A GOVERNMENT DEPARTMENT
Outsourcing—I don’t know whether it is good or bad — is allowed in the foreign banks and the private banks, (and) not in public sector banks... I am not treated as a company. I am treated more as a (government) department.
Chairman, Punjab National Bank
WE ARE BEING UNCHARITABLE TO LOCAL REGULATORS
India has adopted a path of moderated financial sector reforms. Given what has been happening in the global markets...I think it is safe to say that India has been
left with probably just a sneeze while the rest of the financial world has high fever. I think we are being uncharitable to the regulators here.
WILL GLOBAL BOARDS OK LOCAL LISTING?
Foreign banks may look into setting up wholly owned subsidiaries in India. But I would like to ask my colleagues on this dais and some of the other foreign banks: Will their global boards want their Indian operation to be domestically listed with at least 26% of the equities to be placed in private hands? May be the answer is even if they are allowed, they will not like to do it under the current guidelines.
Managing director and CEO, India, Deutsche Bank