Mumbai: India contributes the most to British bank Standard Chartered Plc’s bottomline, accounting for one-fifth of its profit and one-eighth of revenue. Neeraj Swaroop, Standard Chartered’s regional chief executive officer, India and South Asia, spoke in an interview about why StanChart’s Indian depository receipts (IDRs) have not been doing well, the bank’s business strategy and challenges on risk management. Edited excerpts:
Despite acquisitions and the largest branch network, StanChart is still not the largest foreign bank in India.
We are the largest international bank in India on many parameters; I’m not saying on every parameter. If you look at ratios of efficiency and cost-income, we are the best. You have to measure our performance by the growth in revenues and the growth in profits—not the growth in balance sheet. We have steadily grown our balance sheet by 15-20% year-on-year in the last six-seven years.
Where do you need to improve?
To be a successful player, you need a few key ingredients and we have all those ingredients such as technology, capital and human talent. But quite a few (banks) have the same ingredients and everyone cannot become No 1. So, the difference is in execution on a day-to-day basis. The question is, as things change and new opportunities emerge, are we moving fast enough?
After the Citibank fraud, there has been talk about separate regulation for the investment advisory business in banks.
As the business grows, there is always risk. Most well-run banks, including Citi, have very good policies to control their risks. Sometimes, execution gaps happen and you need better monitoring. Do we need better regulation? When the industry becomes big with so many players, I see merit in that argument.
Any change in your risk management approach?
We did a full review of our policies and portfolio to ensure that we do not have similar issues. Our review showed that we have good business practices but still, to ensure that such incidents don’t happen, we have strengthened our training mechanism and checks and balances.
New banks are set to enter Indian banking industry. Are you concerned?
Of course, it’s a worry. It will be hypocritical to say no. But I think there is more to benefit than to lose. We have always been believers in greater competition in the market.
More competition is good for the customer and, at the end of the day, what is good for the customer is good for the industry. There is enough growth opportunities in the market. So, it is not that I am losing sleep...
StanChart has has acquired UTI Securities, the American Express Banking business and the ANZ Grindlays India business. What’s next?
We are bullish on India. We will not let go any serious opportunity to get bigger in India. We are not permitted by the Reserve Bank to look at banking entities, so that is ruled out for the moment. The only inorganic opportunity we can evaluate is non-banking.
If you look at our past, we have made acquisitions for two broad reasons—customers geography and capability. If you look at some of our international acquisitions and UTI Securities here, it is for capability. American Express is also for capability than geography; to add value to the private banking customer. We had a nascent presence in the private banking business. So it gave us private banking scale.
At this point of time, we do not see a capability gap.
Is quality of assets a concern?
When you look at NPAs (non-performing assets), you have to evaluate the business mix an entity has. If a company is in the pure mortgage business, their NPAs tend to be lower. If you are in unsecured loan business and credit cards, which we were in till recently, you will have a high degree of NPAs.
The performance of your much-publicized IDR has not been impressive.
IDR was a brand building exercise with clients, stakeholders and other policymakers in India. The intent was to demonstrate commitment to the core market of the bank. It has achieved the objective.
Every corporate client, policymaker we talked to appreciated the fact that we are listed in the local market. When we did the issue, we did get some amount of retail interest but not as high as we would aim for.
But one must remember, when we did the issue, the European crisis was on. Therefore, we were happy with the amount of retail interest at that point of time. But the instrument does suffer from one factor, which is the tax treatment. We are still in consultation with policymakers.
The beneficial capital gains tax, which applies to Indian securities, does not apply to IDRs because the provisions did not recognize IDR as an instrument when the provisions were written. We are hoping that it will get corrected and that will bring it on a par with other shares. The DTC (direct tax code) may do this.
(Under existing norms, an investor is not liable for capital gains tax on shares that are sold after being held for a year.)
Are you disappointed with the way India has accepted StanChart’s IDR?
I wish we got the right tax treatment when we did the issue. That would have probably fetched a better retail response. It’s not a question of disappointment. We knew that the law existed and we decided to go with the issue despite that. But, we would like the law to change because that will bring greater interest in IDR as an instrument and will also help other IDRs to come into the country.
The other constraint is that insurance companies are not allowed to invest in IDRs. These two changes we believe will make IDR a more popular instrument.
RBI has talked about incentives for foreign banks to locally incorporate in India.
I am very happy that the (discussion) paper has been put out finally. However, we are still not at the point where we can take a decision (whether to subsidiarize or not). There are many considerations, which we have to factor in to understand the implications of guidelines. We are looking at it very closely.
Greater freedom to grow organically is an incentive but that’s not defined fully. What is near-national treatment and how many branches will be permitted? All these we have to understand clearly. Challenges on priority sector treatment are another factor.
I would say that there are a few points which need greater clarity. The biggest one is the issue of capital gains tax. We need clarity, probably a one-time support from the RBI and ministry of finance.
The whole exercise of transforming from one form to another is inefficient from a tax or stamp duty perspective and it will be a big deterrent.
Are your comfortable with the five-year transformation period that RBI is suggesting for achieving the priority sector target?
We would like it to be even more phased out.
What are the StanChart’s capital infusion plans?
Today we are well capitalized at 12%. We never had a shortage of capital to keep up our growth pace. Last two years we have brought in $1.3 billion. Moving ahead, it is a combination of how much we retain from India profits and what we bring in. We have brought in $2.9 billion capital in the country and it is one of the largest FDIs already here.
What is the biggest challenge?
The most critical challenge is to chart a growth strategy for the next five years, given the amount of volatility and uncertainty (in the environment). I have not seen this in my 25-year carrier as a banker. It’s not just the economy but a range of factors—from interest rates to (capital) flows and uncertainties on both international and local regulations. It also includes the local market discontinuities such as the new bank licences, the pace of foreign bank subsidiarization and some of the banking reforms. Post the crisis, we are in a fair amount of flux. In this period, how we chart our growth is the biggest challenge.
Any shift in business strategy?
One of the ways to chart our course is to go back to the basics of what is correct banking. Everybody is expecting that our strategy will change significantly. It probably won’t change at the fundamental level such as discipline around the balance sheet. You have to have the right amount of capital, fund yourself with the right kind of liabilities that are not short term in nature, etc. The challenge is not in strategy but execution.
The strategy will be looking at customer need first rather than what we are trying to sell. That’s the discipline we have brought in and we will continue to do that.
What are your key focus areas?
The key focus areas are small and medium enterprises (SMEs), wealth management and mortgages. The SME business is now our biggest business, accounting for almost 40% of consumer banking and 18-20% of total loan book. It has been growing at 30% per annum.
Our private banking is also doing well with almost $2.2 billion assets under management.
The equity business and institutional brokerage have also begun to take off.
StanChart has traditionally been focusing more on the wholesale business. Will we see a change in business mix?
While wholesale banking is three-fourths of our business and revenue, in our balance sheet, 45% of lending goes to retail. It has been growing as fast as the wholesale side. Revenue on the wholesale side has grown faster, partly because we offer a lot of non-balance sheet products such as loan syndication, corporate finance, etc. That is why the revenues in the wholesale baking have grown faster.
Lending in consumer will continue to grow quite rapidly. It is not a change of strategy; it’s a different business model.
But lending to corporations have been your strength.
We have more competitive advantages on the corporate banking side, given the fact that we are an international bank and provide international solutions to Indian corporations going global. We have leveraged our strength there.
On the retail side, because of the constraints in distribution, we have some disadvantages on our ability to grow... We have focused on the affluent segment. That’s where our distribution is and our brand resonates the most.