After playing second fiddle to local banks for 150 years, foreign banks are gearing themselves up for a larger pie of business in the fast-growing Indian economy and rising consumer lending.
In May 2007, 300-year-old British bank Barclays Plc. launched its retail banking operations in India by introducing its English Premier League Card—a credit card that will set Indian soccer fans a class apart from their other plastic counterparts. Barclays wants to be among India’s fastest growing banks and become one of the top foreign banks in terms of incremental business in the next three years. It is investing $70 million (around Rs285 crore) to meet the initial capital requirement. In October 2005, Deutsche Bank had chosen India as the sixth market, outside Germany, to set up its retail shop, ahead of China. In December 2006, the bank announced a two-stage $280 billion (Rs1,125 crore) capital infusion and bulk of this money to support its newly launched retail operations.
Barclays came to India 150 years after another British-owned bank, Standard Chartered (then called Chartered Bank) set up shop here. Citibank came in 1902, much after the Hongkong & Shanghai Banking Corp. (HSBC) entered India in 1867. Foreign banks have been around in India for one-and-a-half century now. Regulatory controls on their market access and expansion have not changed much, but despite that, global banks are jostling to gain a foothold in the Indian market as the $1 trillion economy is continuing to grow at a brisk pace, offering enormous opportunities.
Standard Chartered Bank brought in $1 billion last year and Citigroup, $800 million. Dutch bank ABN Amro has not been remitting profit for the past 15 years. All of them want to have a party in the world’s fastest growing banking market. Bank credit growth has marginally slowed down to 26% recently, after growing at around 30% for three years in a row, fuelled by consumer lending. This is the most enticing factor for foreign players. Another area where they are seeing a big opportunity is offering banking services to a huge unbanked population in India. According to Reserve Bank of India (RBI) deputy governor Usha Thorat, about 41% of India’s adult population is not served by banks. Over 51% of 147 million rural households in India have no access to formal or informal sources of credit, she says. It is not the rate at which credit is offered, but the access to credit that matters to them. Even Citibank, which has traditionally positioned itself as an elitist bank, is now devising ways to offer banking services to unbanked consumers. “This is no generosity. We see a large business opportunity there,” says Sanjay Nayar, bank’s chief executive officer in India and area head of Bangladesh, Nepal and Sri Lanka.
Constrained by RBI’s restrictive branch licensing policy, foreign banks are eagerly waiting for the regulator to open up the sector in April 2009, when it is set to review bank ownership norms. Meanwhile, they are buying stakes in local banks and setting up non-bank finance companies (NBFCs), which can perform most banking functions except for accepting savings bank accounts.
In February 2005, RBI laid down a road map for foreign banks in India. Going by that, between March 2005 and 2009, foreign banks, which were so far restricted to branch operations, could set up whollyowned subsidiaries. They were also allowed to buy up to 74% of a private bank. The guidelines also said foreign bank subsidiaries with a minimum capital requirement of Rs300 crore would be treated on par with existing branches of foreign banks for branch expansion. However, foreign banks cannot grow unrestrained through local acquisitions; they can buy only weak local banks that the regulator identifies. The second-phase of opening up would commence in April 2009 after “a review of the experience gained, and after due consultation with all the stakeholders.”
None of the foreign banks have set up an Indian subsidiary. They have also not been allowed to buy any local banks, even though quite a few weak banks were up for grabs. At least three old private banks were placed under moratorium, freezing all banking activities, over the last two years before their mergers. These were all offered to local players even though foreign banks were eager to buy them. In all these cases, foreign banks’ proposals did not find favour with RBI as they wanted to conduct detailed due diligence before firming up their plans. The banking regulator, however, was in no mood to give them time as it wanted to lift the moratorium on the weak banks fast and protect depositors from any discomfort for long.
Indeed, foreign banks are unhappy with the space they occupy now. India’s banking industry is dominated by 28 public sector banks, accounting for about 88% of bank branches in the country, 75% of banking assets, 65% of banking capital and 77% of advances. Private banks occupy about 11% of branch network, 17% of deposits, 14% of capital and over 19% of assets. In contrast, foreign banks account for less than half-a-percent of branch network, about 5% of deposits, 20% of capital and less than 7% of banking assets.
Over the past few years, foreign banks’ market share in the Indian banking industry has actually been shrinking. The gainers are the new private banks such as ICICI Bank, HDFC Bank and UTI Bank. They are driving the foreign banks out of the car loan market, and mortgages. Even in the credit card business, Citibank, that pioneered plastic money in India, has been overtaken by ICICI Bank. Foreign banks are, however, unfazed by this as they feel it is profitability that matters, not the size of the balance sheet. “I won’t be in any market for the sake of being there. I need to look after my profit and loss account and the margin,” says Nayar of Citibank. For Standard Chartered, India is a core market. According to the bank’s India CEO Neeraj Swaroop, it now accounts for 14-15% of the bank’s global balance sheet, up from 8.8% last year.
Constrained by local regulations that do not allow them unbridled growth in terms of branch network, foreign banks have been using the NBFC route to add muscle to their balance sheet and expand their activities. This is possible since under the foreign direct investment norms, any foreign player can set up an NBFC once it is cleared by the Foreign Investment Promotion Board and the RBI nod in this case is a mere formality (required only to bring in foreign capital). However, RBI has already acted to snap the regulatory arbitrage by the foreign players. In November 2006, it announced guidelines to regulate NBFCs promoted by foreign banks operating in India on a consolidated basis.
On its part, RBI also does not feel that it is in any way following a restrictive branch licensing policy for foreign players.
Under World Trade Organization norms, the Indian banking regulator is required to offer 12 new branch licences a year, but it has been giving 22-25 branch licences every year. It takes into account the financial position of a bank, its standing abroad, the home country regulator’s view (on the bank) and reciprocity while offering a licence to a bank. This could explain why Citibank has had to wait for years to get a branch licence. Among foreign banks, Standard Chartered has the biggest branch network of 81, followed by HSBC (47) and Citibank (39).
Despite all this, India is a dream market for foreign banks as no other market promises this kind of growth. After spending more than a decade as an NBFC doing small retail loans, GE Capital wants to buy an Indian bank. Two South African banks—First Rand Bank and Standard Bank—are eying India. UBS of Switzerland is also knocking at the door and DBS of Singapore wants a larger presence.
The business landscape has changed dramatically with the opening up of consumer markets. With the economy growing over 8% for years together, people have enough disposable income to buy houses, cars, white goods, computers and entertainment electronics. With a rising aspiration level, the swelling Indian middle class is also leveraging its income many times to buy assets—a trend which was not seen earlier. The opportunities are enormous as retail lending represents only about 20% of the Indian banking industry’s advances and less than 7% of India’s GDP, lower than Thailand at 18%, Malaysia at 33% and South Korea at 55%. Two other growth areas are small and medium enterprises lending and agri-financing. Indian corporations’ aggressive overseas acquisitions are also an opportunity for global banks, as they are well equipped to support cross-border deals with money and a suit of structured finance products.
Given an opportunity, foreign players would love to play the M&A game in India to build their balance sheets and reach. However, none of them is punting on the opening up of the sector in April 2009. They know well that RBI has a well-calibrated approach for opening up the banking sector to foreign investors. By being cautious, India’s banking regulator has been able to avoid major financial crises. Most of the other emerging economies have seen at least one period of significant turmoil in the last decade or so—the Asian financial crisis in the late 1990s, the Latin American meltdown in 2001-02 and Mexico in the early 1990s. But India is an exception. This has also made the market all the more attractive. Whether the Indian banking regulator is ready to open the market or not, foreign banks seem willing to commit capital and enter the Indian market for the long haul. This is simply because no other market offers such growth opportunities.