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India, Singapore open financial turf to bolster trade

A Staff Writer — Wed, 16 Apr 2008 20:06:00 GMT

Mumbai: Since August 2005, when the Indo-Singapore Comprehensive Economic Cooperation Agreement (Ceca) came into effect, trade between the two countries has been rising by 20% every year. Indian companies now account for the third largest overseas group in Singapore with 3,084 firms setting up shop in the city-state. However, the financial sector is one area where both Singapore and India found it difficult to move ahead.

(Illustration by: Malay Karmakar / Mint)

The ice has finally melted. The Reserve Bank of India (RBI) and the Monetary Authority of Singapore (MAS) last week opened up the financial turf of their respective countries. DBS Bank Ltd, the largest bank in Singapore in terms of assets, has got the Indian central bank’s nod to open eight new branches across India. RBI has also issued a licence to Singapore’s United Overseas Bank Ltd (UOB) to open a branch in India, making it the second bank from the city-state to have a presence here.

MAS, on its part, has offered the qualifying full bank (QFB) status to State Bank of India (SBI). India’s largest lender will now be able to raise retail deposits and open 25 centres in Singapore, including automated teller machines (ATMs) and point-of-sales operations. SBI, which entered Singapore in 1977, has one branch but no access to retail deposits.

Over the past two years, two Indian banks—Bank of Baroda (BoB) and Axis Bank Ltd— have been allowed to set up operations in Singapore. DBS, the largest bank in Singapore, was granted one more branch licence in India, taking its branch network to two, just before the two countries signed the treaty. Beyond this, neither RBI nor MAS was willing to open up the financial sector of their respective countries even though both governments had promised to do so.

The hitches

Total bilateral trade in 2007 stood at S$23.9 billion, more than tripling from S$6.8 billion in 2002

Under the treaty, RBI was to allow three Singapore banks to open 15 branches in India and MAS was to give QFB status to three Indian banks. A QFB can raise retail deposits and operate at 25 centres across Singapore, including both brick-and-mortar branches and ATMs. However, no Indian bank was allotted QFB status since August 2005 as MAS was insisting on Indian banks meeting certain criteria as a precondition for this, even though the treaty did not stipulate this.

MAS was, in fact, ready to offer up to three QFB licences to Indian banks, provided they met its “prudential requirements”; it believed that the treaty did not ensure an automatic entry for Indian banks. The insistence on ratings and prudential norms, MAS had earlier said, was in conformity with World Trade Organization (WTO) norms and other free trade agreements.

RBI too was not too willing to allow Singapore banks to increase their presence in India. DBS has been keen to open many more branches in India, but the local regulator has never been encouraging on that front. Two other Singapore banks—UOB and OCBC Bank—were also to be allowed entry under the treaty.

MAS had indeed issued banking licences to BoB and Axis Bank, but neither of them can take up full-fledged banking activities there as they were given licences to open offshore branches.

Singapore has 113 commercial banks, of which only six are local banks. But unlike foreign banks operating in India, overseas banking entities in Singapore cannot undertake all banking activities. There are only six QFBs—Citibank NA, Hongkong and Shanghai Banking Corp. Ltd, BNP Paribas, ABN Amro Bank, Standard Chartered Bank and Malayan Banking Bhd. Besides, there are 24 full banks, 42 wholesale banks and 41 offshore banks.

Among Indian banks, Uco Bank, Bank of India, Indian Overseas Bank and Indian Bank are full banks, while SBI, ICICI Bank Ltd and BoB are offshore banks. Full banks offer the whole range of banking services, but barring Uco (which has two branches) all other banks have a one-branch presence. In contrast, a QFB can operate from 25 locations.

The flashpoint

The impasse reached a flashpoint when RBI disallowed Temasek Holding Pte from raising its stake in ICICI Bank. Ownership norms in private banks in India does not allow any single entity to hold more than 10% in any private bank. But since both Temasek and the Government of Singapore Investment Corp. (GIC) are owned by the Singapore government, RBI preferred to treat them as a single entity and did not allow their combined stake to exceed 10%. This was despite the Singapore government’s insistence that the two are two separate investment vehicles and do not act in concert. This was one of many differences of opinion that cropped up between the two regulators since the signing of Ceca. The government had to intervene and RBI allowed Temasek and GIC to raise their holdings in ICICI Bank as a special case. Incidentally, Temasek also owns 25.8% of DBS.

New relationship

Perhaps it was the RBI nod for Temasek and GIC to raise their holdings in ICICI Bank that marked the beginning of the new relationship between the two regulators. Over the past one year, both RBI and MAS have worked in close cooperation to make things work.

Going beyond banks, the deal between the two will play a larger role in supporting the trade and industry of both the countries even as more and more Indian firms are looking for acquisitions in South-East Asia and Singapore too is keen to play a key role in roads, ports and special economic zones across India.

Interestingly, trade relations between the two countries have improved dramatically despite the two regulators not seeing eye to eye on most issues. Between 2003 and 2005, before the treaty was signed, bilateral trade between India and Singapore had doubled. Total bilateral trade in 2007 stood at Singapore $23.9 billion (about Rs69,000 crore today), more than tripling from S$6.8 billion in 2002. India is now Singapore’s 11th largest trading partner.

India’s exports to Singapore more than doubled between 2003 and 2005, rising from US$1.4 billion in 2003 (more than Rs5,600 crore today) to US$3.6 billion in 2005. Overall, Singapore was the third largest investor in India in 2005, behind Mauritius and the US. Between 2000 and 2007, Singapore was India’s fourth largest investor with US$2.26 billion of cumulative investments.

The beneficiaries

The troika of DBS, UOB and SBI are the first set of beneficiaries of the treaty, but once the regulators move forward at least two more Indian banks will get the nod for a larger play in the island nation and one more Singapore bank will set up shop in India.

Singapore, an important financial hub for South-East Asia, is a strategic money centre on the lines of London, Frankfurt, New York and Tokyo. It will play an important role for Indian entities when the country opts for full convertibility of its currency.

DBS will have its eight branches across the country— Bangalore, Chennai, Kolkata, Moradabad (Uttar Pradesh), Nashik (Maharashtra), Pune, Salem (Tamil Nadu) and Surat (Gujarat). Only three branches are in metros but it is not complaining, as most new branch licences given to foreign banks in India are in non-metros and the banks see huge business opportunity there. Through October, the last period for which confirmed data is available, 29 foreign banks from 19 countries were running 273 branches across India.

Under WTO norms, the Indian banking regulator has to offer 12 new licences every year to all foreign banks but RBI has been liberal when it comes to branch licensing. For instance, between July 2006 and June 2007, the Indian central bank allowed seven foreign banks that have already been operating in India to open 20 new branches and an additional seven to enter India by setting up representative offices.

DBS, which has the largest retail network in Singapore with 83 branches and some 880 ATMs handling at least 50% of all ATM transactions in Singapore, entered India in 1994 by setting up a representative office in Mumbai. This was converted into a branch in 1995. Ten years later it opened its second branch in New Delhi, and also acquired a controlling stake in Cholamandalam Investment and Finance Co. Ltd, a financial services firm with interests in consumer finance, asset management and securities.

UOB, Singapore’s second largest lender, provides a range of financial services through its global network of 524 branches, offices and subsidiaries in 18 countries and territories in Asia-Pacific, western Europe and North America.

It has banking subsidiaries in Singapore, Malaysia, Indonesia, Thailand and the Philippines.

‘We welcome the presence of Indian banks in Singapore’

Staff Writer — Wed, 16 Apr 2008 20:06:00 GMT

In a rare interaction and an exclusive interview with Mint, Heng Swee Keat, managing director of the Monetary Authority of Singapore, or MAS, says Singapore is committed to the Comprehensive Economic Cooperation Agreement with India and welcomes the presence of Indian banks there. Edited excerpts:

Heng Swee Keat, MD of the Monetary Authority of Singapore (Illustration by: Malay Karmakar / Mint)

How do you see the future of the financial sector opening up in Singapore and India?

The cooperation and commitment of India and Singapore in implementing the banking commitments send a strong and positive signal to the business community and contribute towards deepening bilateral economic and investment activities.

The Comprehensive Economic Cooperation Agreement (Ceca) has provided a valuable platform to catalyze economic flows between India and Singapore.

With over 3,000 Indian companies in Singapore as at end-September 2007, Indian companies now form the third largest foreign corporate group in Singapore. Singapore’s FDI inflow into India is also significant. In 2007, it stood at US$1.43 billion, making Singapore India’s second largest investor.

Both Indian and Singapore banks play an important role to facilitate these economic flows. With the recent approvals for banks on both sides to expand their activities, we can expect them to serve the growing business and investment needs even better.

Under Ceca, three Indian banks are to be given qualifying full bank (QFB) status. State Bank of India (SBI) has already got it. When will the other two banks get it?

Prior to granting the QFB licence to SBI, there were already eight Indian banks operating under various licence categories in Singapore, with a total of 14 branches (including sub-branches and limited purpose branches).

The eight banks are: Indian Bank, Uco Bank, Bank of India, Indian Overseas Bank, SBI, ICICI Bank Ltd, Bank of Baroda and Axis Bank Ltd. Bank of Baroda and Axis Bank were admitted after Ceca. The presence of eight different banks from India makes it one of the highest in Singapore in terms of banking entities from a single country.

Singapore is committed to Ceca and we welcome the presence of Indian banks in Singapore. We will review applications from banks that meet our prudential standards.

How many Singapore banks will set shops in India under Ceca?

Under Ceca, India has committed to granting licences for our three local banks to set up 15 branches in India.

DBS Bank and the United Overseas Bank are expanding their presence.

Why did it take so long to open up the sector? The agreement was signed in August 2005.

In implementing any agreement, it is important for both parties to work out the technicalities and details, especially on prudential requirements, if we are to achieve a good outcome.

This will inevitably take some time. MAS is pleased with the level of cooperation with the Reserve Bank of India (RBI). This process of a frank exchange of views has enabled us to have a better appreciation of each other’s supervisory system, and has forged a better understanding among our staff.

We look forward to working closely with RBI and other agencies in India to further enhance our collaboration in developing our financial sectors.

‘We see Singapore as a strategically important market’

A Staff Writer — Wed, 16 Apr 2008 20:06:00 GMT

With 84 offices spread across 32 countries, the overseas operations of India’s largest lender State Bank of India (SBI) cover all time zones and international financial centres. The gross balance sheet of SBI’s overseas business is now close to $25 billion (Rs1 trillion), around 17% of its total business. The bank wants its foreign operations to contribute 25% of its business. The qualifying full bank (QFB) status in Singapore will help SBI achieve this fast. In an exclusive interview with Mint, SBI chairman Om Prakash Bhatt lays down the bank’s game plan for Singapore.Edited excerpts:

Om Prakash Bhatt, SBI chairman (Illustration by: Malay Karmakar / Mint)

What’s your plan for Singapore?

SBI is not new to Singapore; it has been there since 1977. However, our focus has been on wholesale banking, including money market, loan syndication and trade finance activities and transactions are conducted in currencies other than the Singaporean dollar.

We have been fairly successful in this and the current balance sheet is more than US$1 billion. The QFB licence allows us to expand our business operations, particularly in retail, and to build a bigger network in Singapore.

How important is Singapore in SBI’s overall overseas operations?

We see Singapore as a strategically important market as it is an attractive domestic banking market—both in retail and wholesale—with strong Indian linkages. It is also a key global offshore banking hub, specifically in wholesale banking and wealth management. It can be a platform to expand SBI’s next generation international retail banking offering.

We will expand our network to 25 points of presence and offer a full range of Singapore dollar and foreign exchange products to non-resident Indians (NRIs), local Singaporeans, and other expatriates.

We are the first Indian bank allowed to expand in the retail market through opening of 25 new branches and offsite ATMs. We will leverage our vast Indian network in targeting both the Indian expatriates and Singaporeans.

When do you plan to kick off the retail business?

We plan to enter the retail market in the second half of this year with a few innovative product offerings, at competitive rates, both in deposits and advances. Within a year, we may open three-four new branches and a few offsite ATMs. Our focus will be on the mass affluent class, NRIs, and other expatriates. We are working on our business plan.

Overall, how is SBI doing?

Last week we acquired Global Trade Finance Ltd, the largest factoring company in India. Our rights issue has done well. In a volatile market, we have raised over $4 billion. This is the highest amount raised through rights issue in India and one of the biggest rights issues in the world.

We are hopeful that amalgamation and restructuring of our associate banks will be soon in place. We have other plans, too. We are building competencies and synergy across the spectrum of financial services. We want to perform better and serve our vast constituency well.

Indian banks in Singapore

Anup Roy — Wed, 16 Apr 2008 20:06:00 GMT

Mumbai: Eight Indian banks have a presence in Singapore. While Uco bank has a two-branch operation in the country, Bank of India, Indian Overseas Bank, Indian Bank, Bank of Baroda, State Bank of India , ICICI Bank Ltd and Axis Bank Ltd have only one branch each.

To operate in Singapore, a bank needs a minimum cash balance of 3% of its liability base, and 18% of its liabilities should be kept in liquid assets. Out of this, at least 10% is to be invested in Singapore government securities — bonds or treasury bills.

Here is a brief profile of the eight Indian banks operating in Singapore:

State Bank of India: India’s largest lender got the qualifying full bank status on 25 March from the Monetary Authority of Singapore (MAS). SBI will be the seventh QFB in the island nation. Since 1977, SBI has been offering trade finance, corporate loans, deposits and remittance services among other services.

ICICI Bank: India’s largest private sector lender got its offshore banking licence from MAS in August 2003. It is an offshore bank and has applied for a QFB status. It focuses on corporate, institutional and individual banking activities. The key business areas of the branch include foreign currency loans and trade finance. It is also the hub for loan syndication business of the bank. “The Singapore branch is amongst one of the key branches in ICICI Bank’s international banking footprint and contributes substantially to the overall international banking profitability of the bank,” ICICI Bank said. ICICI Bank’s Singapore branch is allowed to operate Asian Currency Unit (ACU); it can carry out banking activities in non-Singapore dollars.

Bank of India: Bank of India enjoys a full bank status in Singapore. Full banks offer the whole range of banking activities. The branch was opened in June 1951 and has the licence to transact business in both domestic banking unit (DBU) — Singapore dollar — as well as ACU. There is no ceiling for the size of business in DBU. It has received approval from the monetary authority of Singapore to increase its ACU business up to US $2 billion from earlier limit of $1.60 billion.

Uco Bank: Uco Bank too enjoys a full bank status. It started its Singapore operations in April 1951. So far the only Indian bank to have two branches in Singapore.

The bank offers retail business services like deposits, remittances and provide for trade financing for both export and import. It offers foreign exchange services to corporations and facilitates external commercial borrowings

Indian Overseas Bank: The first Indian bank to commence operations in Singapore, IOB had set shop in February 1941. It offers full range of banking services with specialization in retail banking services, remittance services, trade finance services and credit services.

Indian Bank: Yet another full bank, Indian Bank commenced operations in Singapore in July 1941. The bank offers a complete range of banking activities, including trade financing, retail banking, rupee remittances, currency dealing and loan syndication.

Bank of Baroda: Bank of Baroda enjoys the status of an offshore bank. It started operations in September 2006.

Axis Bank: Axis Bank too is an offshore bank. It opened its Singapore branch in April 2006. By October 2007, it had a balance of over $1 billion. It is active in loan syndication and trading.

‘DBS has set itself some exciting targets for growth in India’

A Staff Writer — Sun, 30 Mar 2008 19:00:00 GMT

DBS Bank Ltd has been in India for 14 years. Its representative office, set up in Mumbai in 1994, was converted into a branch in 1995, but it had to wait for 10 years to get its second branch in New Delhi. Last week, it got the Reserve Bank of India nod for opening eight more branches at one go. In an exclusive interview with Mint, Pranam Wahi, general manager and chief executive officer of DBS in India, lays down the bank’s India strategy. Edited excerpts:

You have got eight branch licences at one go. How do you plan to use these outlets?

We expect to scale up our wholesale banking business fast as we already offer a full suite of products to our corporate and SME (small and medium enterprises) customers in Mumbai and New Delhi.

The new branches will allow us to reach out to a larger group of customers. With specific products, for example, cash management and trade finance, location is critical to being able to extend a worthwhile proposition to our customers.

What’s your India strategy?

Our wholesale banking products connect with the rest of our Asian banking network. Since 2007, this product suite has been in place and our new branches will allow us to take this product suite to a larger base of customers.

For the retail banking customers, we will extend our well-regarded “treasures wealth management” proposition and follow it up with other exciting products. We will consider new additions to our network such as ATMs and Internet banking, and new products such as debit and credit cards.

How much capital will DBS invest in India? When do you anticipate to break even?

DBS’ operations in India are amply capitalized with 29.2% capital adequacy ratio as in March 2007. We will seek additional capital as required by our growth plans. Our Indian operations are already profitable.

Most of your new branches are in relatively smaller cities. Isn’t that a handicap?

We see worthwhile business in all the locations where we will open our new branches. We see specific opportunities to participate in the growth of tradeand industry in the smaller locations.

DBS has got eight branch licences in India and State Bank of India the qualifying full bank status in Singapore. There seems to be a quid pro quo between the two regulators…

We cannot comment on this.

What are the key challenges for DBS in India? Which foreign banks do you compete with in India?

We are still in the very high-growth phase of DBS’ plans in India and see many exciting opportunities.

The profile of competition depends on specific business segments. There are obviously some very well-established global banks operating in India but we also have very healthy respect for the local banks as well. We believe DBS’ capacity to offer an Asia-specific focus is a unique proposition at a time when trade and investment flows between India and the rest of Asia are on the rise.

We also believe that our home base of Singapore is becoming an increasingly important hub for Indian companies looking to establish regional and/or holding companies to access equity markets through their offshore subsidiaries and debt markets through products such as foreign currency convertible bonds and real estate investment trusts.

There is a talent crunch in Indian financial sector. How do you plan to tackle this?

We have not encountered this problem as yet. DBS has set itself some exciting targets for growth in India and the region, and we have been able to recruit talented individuals.

We have also been able to offer opportunities to our Indian recruits to undertake interesting work elsewhere in our global network and view this as a particularly rewarding aspect of operating in India.

How does Cholamandalam DBS Finance Ltd fit into your strategy?

We see our investment in CholaDBS as an integral part of our strategy in India. CholaDBS operates over 200 locations in India and undertakes commercial vehicle financing, personal loans and a number of other lending products, as well as stock broking, distribution and asset management.

DBS Bank completed the acquisition of a 37.5% stake in CholaDBS in 2006, with the stated aim with our JV partners of developing a leading retail financial services company in India.

Won’t you be competing with CholaDBS now that you operate more branches in India?

We are a bank with a fairly specific target segment in terms of wholesale and retail customers, whereas CholaDBS is a finance company which has its own target segments.

Will you look for acquisitions if the Reserve Bank of India opens up the sector in 2009?

At this stage, it’s a bit too premature to comment.

Foreign banks jostle for foothold

By A Staff Writer — Sun, 29 Jul 2007 19:19:00 GMT

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.

‘We will be on the lookout for acquisitions’

By Gargi Banerjee — Sun, 29 Jul 2007 19:19:00 GMT

CEOs of four leading foreign banks in India—Sanjay Nayar of Citibank, Neeraj Swaroop of Standard Chartered, Romesh Sobti of ABN Amro and Vishwavir Ahuja of Bank of America—were asked to give their views on six contemporary issues—the Indian market, foreign banks’ edge over competition, profile of competition, capital infusion to support growth in India, innovations and, finally, on their plans in April 2009 when the Indian banking regulator is set to revise the ownership norms.

Given a choice, all four are keen to grow in India through acquisitions. They admit that competition is intensifying both from private banks as well as their counterparts in the public sector, and the foreign banks are no longer the sole innovator in the Indian financial space. Yet, all four CEOs are bullish on the Indian market. They are ready to commit any amount of capital to seize growth opportunities with both hands. Edited excerpts:

Your take on the Indian market?

Sanjay Nayar:We have been in India for over a century now. Our role has evolved from a trade finance bank to a bank that provides a complete suite of products for everybody. We are bringing the power of Citigroup to a huge client base in India.

Rapid urbanization and growing investments in manufacturing and services sectors have made India attractive. We have been a local bank catering to local needs all along. Five-and-a-half years ago, when I came back from New York, I had a clear mandate—“Make it even further local and be embedded in the country”. That’s what we have been doing.

Client acquisition has always been a priority for us. On the one hand, we are servicing the high net worth corporate clients and, on the other, reaching out to the consumer finance clients who have earnings of less than Rs1 lakh per year. We have acquired a significant chunk of the small and medium enterprise business. Now we are offering banking services to unbanked consumers. This is no generosity. We see a large business opportunity there.

Neeraj Swaroop:We entered India in 1858. The profile of customers and products have been evolving—from traditional banking products, such as savings accounts, to widespread use of ATMs, personal loans, mortgages and auto loans. Today, sophisticated customers are asking for personalized services; traders are looking for sophisticated risk hedging mechanisms; and corporate clients are looking at outbound acquisitions.

India is a core market for Standard Chartered globally, accounting for 14-15% of the bank’s global balance sheet, up from 8.8% last year.

Romesh Sobti: India offers a level playing field in terms of products and services and a target market with a critical mass. Fifty per cent of the Indian population is below 25 years of age and this large group is accessing consumer debt. All these make the Indian market attractive for us.

We believe that with smart coverage we can have access to a large fee pool in areas such as insurance and asset management, foreign exchange business, etc. Where we score over local banks, is we do not have to spend time making products such as derivatives. All we have to do is to customize them to service our Indian customers. We do not have to start a production factory.

Vishwavir Ahuja:We have been in India since 1964 and have seen the ambitions of Indian entrepreneurs rise as the economy liberalized. Being a wholesale bank, we have seen the increase in the need for finance among Indian corporations. Today we are a preferred choice for large Indian firms such as Reliance Industries, Infosys Techonologies and Wipro Technologies. India is a top priority nation in terms of scope among the 39 countries where we operate.

Your edge over competition?

Swaroop:Our edge is service and the global relationships that we offer to our clients. Corporate clients are harbouring ambitions of cross-border presence and we can provide them end-to-end services. For instance, in the recent Maxis-Aircel deal, we were bankers to Maxis in Malaysia and Aircel in India.

Our edge is also intellectual property. We are present in sophisticated markets and we understand structured finance products better than our local counterparts. When the banking regulator opens up the sector, we expect to be a market leader in product offerings to customers.

Nayar: We can successfully juxtapose the global with the local. We are servicing every customer segment with a complete suite of products for individuals as well as corporations. I don’t see any other bank that has our width of operations.

Our closest competitors in the private sector can’t match our expertise in global finance and leverage finance. Even other foreign banks do not have localized access to brokerage, capital markets and investment banking that we enjoy.

Ahuja: Our edge over both foreign and private banks is our ability to service Indian corporations when it comes to cross-border deals. Large firms need banks with large balance sheets. With a global balance sheet of $1.5 trillion and expertise in several markets, we score over competition.

Sobti: We will score over others when norms for overseas investments get more relaxed. The Reserve Bank of India is slowly moving towards a fully convertible currency. Today the outward investment for a retail investor is limited but soon there will be scope of a family investing $1 billion annually. This is where we come in. We have a huge network internationally and we are better equipped to provide global trade solutions and cash management.

Your plan for infusing fresh capital for Indian operations?

Ahuja:Our capital base as of March 2007 is Rs1,777 crore. We will not remit our profits to the parent bank. We have enough capital and would like to deploy it prudently.

Swaroop:Over the last year alone, $1 billion has been brought into India operations. The parent bank has allocations for different countries but we do not have a country limit for India. We are totally committed to the Indian operations and are embedded as a local player. We will bring in our product expertise to the Indian market and concentrate on providing the best services to the customer. We are particularly bullish on wholesale and consumer banking and capital will never be a constraint for us.

Sobti: We are well capitalized. We have not remitted our profits for the last 15 years—a huge number in itself. If you see the peer group numbers, we have the fastest-growing balance sheet in overall assets and advances. The parent fully understands the growth opportunity in India and we are not constrained either by country limits or by capital. The only constraint that we face is access (in terms of branch network).

Nayar: We are adequately capitalized and India continues to be an important destination for the parent bank. Our commitment is servicing clients and gaining market share even with the constraints of access.

Expectation from RBI when it reviews bank ownership norms in 2009?

Sobti: We are not expecting a big bang change but a gradual change in the form of allowing foreign banks to acquire private banks. We have always been interested in inorganic growth. We will scout for opportunities when the scope increases. Till then, we will have to use our branches smartly to get the best access (to customers and fee pools).

Swaroop:We are currently constrained by a limited number of branches and cannot access the large retail pool in tier II and tier III cities. We are eagerly waiting and watching the moves of the Indian central bank. We hope that policies are liberalized for our growth—both organically and inorganically.

Assuming that the central bank will give foreign banks the liberty to acquire Indian banks, we will be interested, depending on the opportunities available and the cost of acquisitions.

Nayar: The regulator has given us a well-documented road map. We are happy to wait and watch as it evolves. Things may happen a little later than 2009, depending on factors such as consolidation in the domestic banking sector and implementation of the Basel II norms. If you ask me for my wish list, I would say foreign banks should be allowed to float subsidiaries. We could become a wholly owned subsidiary of our parent and look and feel like an Indian bank. We will be on the lookout for acquisitions as and when the regulator allows it but till then we are concentrating on growing organically.

Ahuja: We have adopted a wait and watch policy for 2009. We are expecting some liberalization in ownership norms but it is too premature to comment at this point.

Foreign banks in India don’t seem to be innovative enough.

Sobti: The field of innovation has widened. Ten years back, foreign banks were the sole innovators. Now you have private banks. This does not mean that foreign banks have stopped innovating. It’s just that you do not see innovations in isolation. And innovation today does not mean a radically new product; it means a little tweaking here and there.

For instance, a credit card is no longer an innovation. But the fact that you can determine a limit on a credit card is an innovation. We have recently introduced a credit card that gives 2% cash back across all purchases. This is an innovation in a small way.

Swaroop:I do not think foreign banks have stopped innovating. It’s just that the scope of innovations has become much larger with private banks getting much more access to the retail pool.

Nayar: Citi has led the way on innovations and we still have quite a few firsts to our credit. For instance, we were the first to launch biometric ATMs in Dharavi (in Mumbai) and Hyderabad. We are the first to innovate on commodity hedging. The next space of innovations for us is clearly in the area of financial inclusion. We need to combine innovation with mobile commerce as we cannot have branches in remote rural pockets.

Ahuja: Innovations are plenty on the debt side. A number of complex and sophisticated products are used by our clients worldwide. We did the first US private placement for companies such as Reliance Industries and Indian Oil Corporation in 2006. We are also ready with innovative products such as credit-default swaps. As the markets open up, we will be pioneering innovation on the debt front.

Finaly, your take on competition?

Sobti:Competition is already intense and it will get stronger. There will be a few more players coming in but the market is huge, growing at a rate of 25-30%. Nobody is worried about new players. What we should concentrate on is giving the consumer a different proposition. If you bring value to the customer by way of convenience, it engages her.

Swaroop:Competition will intensify as public sector banks consolidate and new entrants enter wholesale and retail banking. In order to beat competition, we have to constantly keep innovating even with the constraints that we have. Our differentiator will be the value-added service that we offer to our clients.

Ahuja: It is true that we have a lot of banks in the country but they are vying with each other on the same product segments and same markets. The need of the day is to increase reach and offer a complete range of banking services to the untapped markets beyond metros and Tier I cities.

Nayar: I think competition will get stronger but we will have to differentiate in terms of value-added propositions and quality of service.

Foreign banks await RBI’s green signal to branch out

By Rana Rosen and Saumya Roy — Sun, 29 Jul 2007 19:19:00 GMT

What do Citibank India head Sanjay Nayar, HSBC India CEO Naina Lal Kidwai and ABN Amro country executive in India Romesh Sobti have in common? All of them have set their eyes on domestic banks and, given a choice, they will acquire the target banks before the regulator says, “go”. They have the money, aggression and willingness to grow in a market that promises big margin business.

Banking experts have no crystal ball to see the future landscape of the industry, but agree on the main ingredients: domestic mergers, more investment from foreign banks, some foreign takeovers of private banks and some consensual nuptials if the regulator opens up the sector. But the experts and foreign banks disagree on when, if and how much the regulator will do to welcome a greater foreign presence.

Many of the big foreign banks had come to India in some form or the other as far back as a century and a half ago, but it was only in 2005 that the Reserve Bank of India (RBI) drew the first clear roadmap on how they could operate here. And RBI promised to re-evaluate these rules four years later.

In the meantime, Indian banks were given time to strengthen their balance sheets, consolidate and overall become more robust, so that they could compete. The regulator, did not however, promise that it would take away the ring of protection around local players in April 2009, when the norms are due to be reviewed. Foreign banks in India are hoping and planning, but do not expect any major changes in 2009.

Standard Chartered in India is watching the space closely. “We feel constrained with the number of branches that we have,” says Neeraj Swaroop, head of Standard Chartered Bank in India. “Assuming that the Reserve Bank of India allows foreign banks to acquire, we will be interested, depending on the opportunities available and their pricing.”

Experts say, that before 2009, public sector banks would like to join forces, and note that finance minister P. Chidambaram has supported the idea. Yet public sector banks, like it or not, are unlikely to be taken over by foreign banks if the policy opens up in 2009, even though many are weak and ripe for a strong partner. It is the private sector banks that would be targeted.

“Private sector banks, although more expensive, would be attractive targets for foreign banks,” says George Chrysaphinis, a financial institutions analyst with rating agency Moody’s Investors Service. “Public sector banks have significant legacy issues, namely huge ageing workforces, inefficient networks and poor working practices.”

Sanjay Aggarwal, national industry director for financial services at KPMG India Pvt. Ltd says, “They (private sector banks) are not up to speed in terms of computerization and profitability.”

Also, private banks in India are relatively affordable to foreign banks. India’s largest bank, ICICI Bank, has a market capitalization of about Rs86,000 crore while Kotak Mahindra, for example, has over Rs20,000 crore. Citigroup’s market cap is over $271 billion (about Rs11.1 trillion). “In the international context, Indian banks are still very small,” says Robin Roy, associate director at PricewaterhouseCoopers Pvt. Ltd.

Banking analysts say foreign banks will be taking all this information into consideration as they form their strategies between now and 2009. They will be deciding whether to compete with Indian banks on volume, or go in for niche services as they have been, recently. They will be thinking about whether to expand geographically—maybe into smaller cities—or in their products and services, including offerings to small- and medium-enterprise (SME) clients. Roy says they are looking forward to newer models for SMEs and are expecting a relaxation on mandated lending. There may also be early meetings with private banks and investment bankers as some foreign banks scout the landscape for strong potential partners and acquisition targets. Roy says that clearly some will grow on their own, while others will look for ways to expand quickly.

Despite all these possibilities, experts and foreign banks do not expect much to happen in 2009. “I don’t think 2009 is going to be a magic year where, suddenly, foreign banks can come in, start acquiring banks and become very large, but they will have a much more liberalized regime than what it is right now,” says H. N. Sinor, chief executive officer of Indian Banks’ Association (IBA), a premier banker body in the country.

“But, still, it will take some time before they can have a complete free play in the system.” Aggarwal of KPMG India notes that 2009 is also an election year, and says, “I think the issue will get evaluated once the political climate is clear.” The foreign banks also agree that the political scenario could dominate the central bank’s decision.

“We are not expecting any big bang to happen in 2009 itself,” says Romesh Sobti, country head for ABN Amro bank. “There may be a gradual change in ownership, but that will take a while. Till then, we will have to make smart use of our resources.”

Others like Sanjay Nayar, chief of Citibank in India, also thinks that 2009 may not be a year of transformation, but hopes for the ability to be a wholly owned subsidiary of its parent. “Given the opportunity, we would be like any of our private banks in India, to look and feel like an Indian bank,” says Nayar, adding that acquisition may not be high on his agenda. “Till 2009, we will have grown substantially organically. Valuations may not be the best then, so acquisition will depend on what the market has to offer at that time. Till then, we will wait and watch.”

The timing may not be certain but most experts agree that the sector will have to open, and there have already been some signs. Roy notes that the increased cap in individual investment abroad is serviced by foreign banks. Ashwin Parekh, partner and national leader of global financial services at Ernst & Young Pvt. Ltd, highlights two occasions when individual permission was granted by the banking regulator. The first was to Citibank for its investment in Indian mortgage major Housing Development and Finance Corp. (HDFC), and the second, to Rana Talwar, former Standard Chartered global chief executive who took over Centurion Bank through a fund. “There will be more risk-based regulation,” Roy says. “Depending on the risks that a foreign bank presents, the regulator will try to bring in different regulations.”

Experts and the foreign banks say the regulator will be concerned about the state of domestic banks and their ability to compete and based on that it will decide how far to open the faucet. “They (the foreign banks) will become a major player if they are allowed free operations in India,” Sinor of IBA says. “I am very sure they would immediately emerge as the market leader.”

The banks, particularly the public sector ones, have sufficiently strengthened their balance sheets, but have not joined forces to be able to compete with the foreign banks on scale and size.

In addition to these domestic concerns, many experts say that RBI will consider how welcome Indian banks are abroad when they try to expand. Roy says, “If reciprocity is not the order of the day, the local regulator will play the game as the others have played it.”

Traditionally, the driver for a majority of M&A deals in the Indian banking space is the regulator’s sensitivity to protect depositors’ money. While announcing the time frame for foreign banks’ play on Indian turf, ringfencing weaker financial intermediaries from predatory attacks, RBI has laid down certain norms for domestic players.

For instance, all banking entities must have at least Rs300 crore net worth (capital and free reserves) and a wider investor base with no single player holding more than 10% stake. In case of one bank holding stake in another bank, it is capped at 5%. RBI has not laid down any timeframe for this but analysts feel the deadline will coincide with the opening up of the sector.

Only a handful of old private banks have not yet fulfilled these norms. If they fail to do so by April 2009, they may be offered on a platter to the foreign player if RBI decides to open the sector.

rana.r@livemint.com