Mumbai: Five years after laying down the road map for foreign banks’ play in India, the country’s central bank is set to allow them a bigger role in the world’s third fastest growing $1 trillion-plus economy after China and Brazil.
The Reserve Bank of India (RBI) will soon invite public comments on a discussion paper that will suggest almost doubling foreign banks’ share in Indian banking assets to 15%.
All new overseas entrants in the Indian banking space will be asked to locally incorporate themselves while existing players will be encouraged to go in for local incorporation and act as subsidiaries of foreign parents and not their branches.
Once they do so, they will be treated virtually on a par with their domestic peers in terms of branch expansion regarding which the banking regulator has all along been following a restrictive policy.
Graphic: Ahmed Raza Khan/Mint
The central bank is discussing the finer points of the proposal with the government and the discussion paper will be put up on its website very soon, a person familiar with the development told Mint last week. The person did not want to be named, considering the sensitivity of the issue.
A senior RBI official, involved in the process of drafting the policy, confirmed this on Monday.
Currently, there are 32 foreign banks in India and collectively they have 310 branches, 0.43% of the 71,998-strong branch network across the nation. Standard Chartered Bank leads the pack with 95 branches, followed by Hong Kong and Shanghai Banking Corp. Ltd, or HSBC, (50) and Citibank NA (43).
Their market share in banking assets is 7.74% and 8.37% in profits for the year ended 31 March. Foreign banks in India account for 5% of the total deposits in the banking system, 4.67% of advances and 9.27% of investments.
Under a 1997 commitment given to the World Trade Organization, RBI needs to give 12 new branch licences to foreign banks every year, including those given to new entrants and existing players, but the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment, but not as many as the foreign banks want.
Once the policy is in place, the regulator will be more liberal in its branch licensing policy, but foreign banks may not quite get the “national treatment”. “The challenge will be maintaining the 15% cap in assets. What do we do when their market share in assets come close to 15%? We won’t be able to give them a free hand (for branch licences). This is the challenge. We are looking into all these,” said the RBI official cited above.
The locally incorporated foreign banks will be subject to the same set of banking norms that domestic banks follow. For instance, 40% of their loans will have to be given to agriculture, small-scale industries and the weaker sections of society—the so-called priority sector—and 25% of their branches need to be located in rural India.
Currently, foreign banks need to channel only 32% of loans to the priority sector, which for them also includes loans given to exporters. There is no stipulation on rural branches though RBI is relatively liberal with foreign banks proposals for setting up branches in such areas.
Once they choose to take the subsidiary route for Indian operations, foreign banks will be given time to achieve the priority sector lending target.
Their tax liability will also go down from 40% to around 33%.
“If this is true, it will give us a tremendous play in India. We will be very happy to locally incorporate if there are tangible benefits,” said the CEO of a foreign bank who did not want to be named as the policy is not yet in the public domain.
A banking consultant, also on condition of anonymity, said: “It’s all mathematics. Once foreign banks’ market share in assets is doubled, their growth will depend on how fast the local players are growing.”
While that is true, historically, foreign banks’ share of banking assets in India has been around 7-8% and once this goes up to 15%, they will definitely play a larger role in the country.
In 2005, RBI released the guidelines on ownership in private banks and acquisition norms for foreign banks. It threw a protective ring around local players for four years by not allowing foreign banks to make acquisitions in India but promised to review its policy after March 2009.
RBI could not review the policy in 2009 in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc., the unprecedented credit crunch that the world faced and the dramatic change in risk perception.
“Globally, the focus is on ring-fencing banks to minimize the damage in case of a collapse and this can be done better when they are locally incorporated,” said the RBI official.
The 2005 guidelines allowed foreign banks to set up wholly owned subsidiaries to conduct business in India, but did not change the existing branch licensing procedure. No foreign player has taken this route as yet as the norms for the wholly owned subsidiaries were never made public.
In terms of assets, Citibank is the biggest foreign player in India with Rs95,490 crore worth of assets in fiscal 2010, followed by HSBC (Rs90,441 crore) and Standard Chartered (Rs89,545 crore).
Their pace of growth has been much slower than local peers. The compound annual growth rate (CAGR) of HSBC’s assets in the past five years was 19.27%, Citi’s 16% and Standard Chartered’s 14.27%. In contrast, Axis Bank Ltd, which is double the size of HSBC’s India operations, has grown at 29.41%. HDFC Bank Ltd, another Indian private bank with an asset base of Rs2.23 trillion, has grown at a five-year CAGR of 24.78%. Even State Bank of India, the nation’s largest lender with Rs10.54 trillion of assets, has grown its book at 16.36%, better than Citi and Standard Chartered.
However, the growth in off-balance sheet items in foreign banks’ books such as guarantees, securitized loans, derivatives, among others, have been higher than the domestic banks. While calculating their market share, these exposures, too, will be taken into account.
Standard Chartered started its Indian operations by opening its first branch in Kolkata in April 1858, a year after the so-called First War of independence in which sepoys of the British East India Co.’s army rebelled against the colonial rulers. HSBC’s origins can be traced back to October 1853, when Mercantile Bank of India, London and China was founded in Mumbai. It was acquired by HSBC in 1959. Citibank is 108 years old.
Among other foreign banks, Deutsche Bank AG, 30 years old in India, is present in 12 centres through 13 branches. Barclays Bank Plc, which launched its India operations in November 2006, has seven branches.
UBS AG is one of the latest entrants in Indian banking space. Goldman Sachs and Morgan Stanley are awaiting RBI’s nod to enter commercial banking while Nomura is planning to move the regulator for a banking licence.
With its economy growing at 8.5%, corporate earnings growing at 20% and more and more consumers buying homes and cars, India is emerging as one of the most lucrative destinations for global banks.