Why foreign banks are going to small cities4 min read . Updated: 03 Dec 2007, 12:07 AM IST
Why foreign banks are going to small cities
What do Akola, Nanded, Jalgaon, Kanchipuram, Nelamangala, Kurnool and Siliguri have in common? These small towns in Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh and West Bengal have suddenly become the darlings of foreign banks in India. Over the past one year, these banks have set up 23 branches in such small towns where they never dared to tread.
Akola, located around 600km east of Mumbai, is the largest cotton-producing district in India. This region is also known for its pulse, oil and textile mills.
Famous for its gurudwaras, Nanded is an important holy place for the Sikh faith. One of the backward districts of Maharashtra’s Marathwada region, Nanded has a number of solvent plants and is a large producer of bananas. Cotton and jawar are the other predominant crops grown here.
The hometown of President Pratibha Patil, Jalgaon is known for pipe manufacturing, pulse milling and mattress manufacturing. It is the banana capital of India.
Temple town Kanchipuram in Tamil Nadu is famous for its silk saris. More than 5,000 families are engaged in this industry. The main activity in Nelamangala, 27km from Bangalore, is the manufacture of silk clothes and agarbattis (joss sticks). Kurnool in Andhra Pradesh is known for handloom weaving. Siliguri, the gateway to the North-East, is known for tea, timber, tourism and transport.
Citibank has got licences from the Reserve Bank of Indian (RBI) to set up three branches, at Akola, Nanded and Kurnool. ABN Amro has received the regulator’s nod to open branches at Kolhapur, Salem, Udaipur, Jodhpur, Ahmedabad, Agra and Jalandhar. Deutsche Bank will open branches at Kolhapur, Aurangabad, Salem, Vellore and Pune. HSBC will go to Raipur, Jodhpur and Lucknow, and Standard Chartered Bank to Siliguri and Jalgaon. Finally, Barclays Bank Plc., which launched its retail operations in India in May 2007 by introducing its English Premier League Card—a credit card that will give a kick to Indian soccer fans—will reach out to Kanchipuram, Nelamanagala and Junagarh.
Why are foreign banks making a beeline to open shops at these places? RBI is following a liberal branch licensing policy for those foreign banks who want to go to the unbanked pockets. For instance, Barclays would possibly have had to wait for years to get a licence to open a branch in one of the four metros. But there is virtually no waiting period for places such as Kanchipuram and Nelamanagala. Indeed, these pockets are not serviced by too many banks. But the foreign banks are going there not to please the regulator. They have started sensing enormous business opportunities in financing trade and small and medium sectors in small towns in the world’s second fastest growing economy.
Not too many people know that Kolhapur has one of the highest per capita incomes among Indian cities and the number of Mercedes cars that ply on its roads is next only to Mumbai among all places in Maharashtra. Similarly, Nelamangala is situated just a few kilometres from Peenya Industrial Estate, the biggest such hub in Asia, where 800 small, medium and large industrial units operate.
Twenty-nine foreign banks are present in India through 273 branches and 871 offsite ATMs. Besides, there are 34 foreign banks operating through representative offices. Four have set up shop in the past one year. They are Banco Bilbao Vizcaya Argentaria, Spain’s second largest bank; Italy’s Banca di Roma; the Dublin-based Depfa Bank Plc.; and National Australia Bank Ltd. Given a chance, all banks would like to convert their representative offices into branches.
India had committed to the World Trade Organzation (WTO) in 1997 to give 12 new branch licences to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, in the last four years till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms).
Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double digit branch presence is Deutsche, 11.
Despite their growing presence, foreign banks still have a very small market share in the Indian banking industry—6.11% of total deposits and 6.83% of total loan advances. But their returns from Indian operations are far higher than those of their local counterparts. For instance, the average net profit per branch for foreign banks in India was Rs11.99 crore last year against Rs33 lakh for the public sector banks that account for close to 70% of the industry. The return on assets for foreign banks last year was 1.65% and return on equity, 14.02%. The comparable figures for public sector banks were 0.82% and 13.62%. Now you know why foreign banks are ready to walk the extra mile to do business anywhere in India.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to email@example.com