Some time ago, Standard Chartered Plc moved the Indian central bank, seeking approval to open 100 branches in rural India. It has not yet heard from the Reserve Bank of India (RBI) on the request. Typically, regulators neither say “no” nor “yes” to any proposal they are not comfortable with. I did try to check the status of the Standard Chartered proposal with one RBI executive. There was no straight answer. Instead, I was told there was no point in opening branches in rural pockets and asking depositors to keep a minimum balance of Rs10,000 or more in their accounts because most of them cannot afford it. I am not aware of the business model that Standard Chartered was planning to adopt in these 100 rural branches, but it may not be a bad idea to allow foreign banks to experiment in this space.
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 Company’s army rebelled against the rulers. With around Rs1 trillion of assets, Standard Chartered now has 94 branches spread over 37 centres.
Hongkong and Shanghai Banking Corp. Ltd, or HSBC, has been in India even longer. Its origin can be traced back to October 1853, when Mercantile Bank of India, London and China was founded in Mumbai with authorized capital of Rs50 lakh. By 1855, Mercantile Bank had offices in London, Chennai, Colombo, Kandy, Kolkata, Singapore, Hong Kong, Guangchow and Shanghai. It was acquired by HSBC in 1959. With close to a Rs1 trillion asset book, HSBC has 47 branches and three new branch licences in India.
Citibank NA, which has the biggest asset base among all foreign banks in India, is 107 years old. It has 42 branches across 29 centres. Among other foreign banks, ABN Amro Holding NV, which came to India in 1920 (again, Kolkata was the first port of call), has 31 branches and 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.
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Foreign banks in India account for roughly 6.5% of the banking industry’s assets and there has not been any change in their market share over the years. RBI’s reluctance to allow them a larger play is indeed one of the reasons behind this. The other reason could be foreign banks’ reluctance to be more innovative. In fact, I often feel these banks use RBI’s restrictive branch licensing norm as an excuse for their lack of innovation. 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.
Indeed, foreign banks are instrumental in introducing Indian consumers to ATMs and credit cards, but they have not done much in the consumer space ever since new Indian private banks such as ICICI Bank Ltd and HDFC Bank Ltd made their appearance in the mid-1990s. Citibank is no longer the largest credit card issuer in India. It has shut its auto loan window and is not a leading player when it comes to mortgages. In fact, the last serious product innovation by any foreign bank in India was Citibank’s Suvidha account that introduced millions of consumers to branchless banking. It was a roaring success in Bangalore in the mid-1990s, but Citi could not replicate the success story in other metros as by that time, India’s new private banks had set up shop. These technology-savvy banks offer consumers everything that a foreign bank can, and much more.
Do we need foreign banks in India? I recently put this question to two expatriate CEOs—Mark T. Robinson of Citi and Stuart A. Davis of HSBC. Robinson found the question “provocative” and Davis “interesting”. “I haven’t heard of any country that has said we don’t need to benefit from practices that seem to work in other markets,” Robinson told me. He also offered to give me a list of Citi’s top 100 customers and hoped they all would say that they have benefited from Citi’s global experience.
With Indian firms increasingly looking for investments overseas, foreign banks will play a critical role in raising money for them, connecting them with a global clientele and consumers. No one can deny this. At the same time, they need to look at Indian business opportunities differently. Instead of focusing only on corporate clients and urban consumers, they can reach out to the low-income groups and deliver banking services at an affordable cost and still make money. There is enormous scope because only 60% of the adult population in India has bank accounts. In rural areas, the coverage among the adult population is ever lower. Foreign banks have started reaching out to small towns such as Akola, Nanded, Jalgaon, Kanchipuram, Nelamangala, Kurnool, Siliguri, Mangalore, Muradabad, Nashik, Panipat, Tirupur, Salem, Udaipur, Kolhapur and a few others, but a few branches in different states may not make their rural banking experiment profitable. One way of penetrating rural and semi-urban India could be approaching one or two states with a cluster of branches instead of spreading the branch network too thin across the country. RBI can offer each bank as many branches as it wants in a particular state or two. This can be a win-win strategy for consumers and banks as well as the regulator.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at email@example.com