Home / Opinion / The deceptive lure of Indian banks’ international businesses

Many public sector banks have had a presence abroad for several decades. They have typically followed the expatriate Indian or his business and supported them. For example, Bank of Baroda and Bank of India have had large international operations, now close to 25% of their total business. In a few cases, the Indian bank is looked upon much like a local bank in that region.

A predominant portion of the international business is trade finance, followed by NRI businesses such as remittances and loans. Finally comes a small, relatively recent phenomenon—forays into true local businesses, i.e., activities that have little or no Indian connection. Recent examples have been ICICI Bank Ltd investing in CDOs (collateralized debt obligations) in the US or MBS (mortgage-backed securities) in the UK, or the bank’s entire Eurasia business, for that matter.

The fact that Indian banks are not well-equipped as yet to finance large amounts of truly local businesses in other countries without a sufficiently long presence there is now more or less understood. Banks have learnt their lessons—there have been credit quality hiccups or outright problems with ICICI Bank in the UK (MBS losses), Russia and Singapore (Bakrie group exposure), Bank of Baroda in the UAE (Nakheel group), Bank of India (Lehman)—all during 2008-2010. There have been some unfortunate regulatory infractions as well (ICICI in Hong Kong, 2006).

However, it is the India-related business where banks need to be more vigilant and build greater controls, as events of the recent past have shown (e.g. Axis Bank Ltd’s exposure to the GMR Maldives Airport contract that was rescinded). India Inc is continually making noises about doing more internationally than in India due to the lengthy business approval processes in India. Since the international business all began with Indian banks wanting a slice of the cake historically largely left to foreign banks, Indian banks may want to expand the share of the pie.

But the reasoning propounded by banks - “we know the Indian company’s risk much better, and hence (are) capable of supporting it internationally as well"—which has worked very well in the past, may be that much harder to work now. First, global complexity for Indian business itself has increased by leaps and bounds. This topic can fill pages, but a simple examples can illustrate. All of a sudden, protectionism for local employees in Saudi Arabia (nitaqat) led to mass deportation of Indian workers and hence a fall in NRI remittances (hurting South India-based banks the most). The constant on-off of US liquidity coupled with euro zone problems has also made the international borrowing market difficult for banks.

Second, it is not just trade finance any longer. The advantage of trade finance is that it is essentially short-term credit, and hence risk levels are correspondingly lower. But if Indian banks want to piggyback on Indian companies’ grand global aspirations in a big way, it will mean (or has meant) longer-term loans for projects, like coal mines and airports. And evaluating the project risk of a coal mine in Bolivia is not the same as one in Chhattisgarh (even though the latter my actually be more complex).

India Inc doing serious business abroad itself is at a nascent stage. And Indian banks’ understanding of international business risk will have to be a hand-me-down from the experiences of India Inc, not the other way round. This warrants greater caution on the part of banks.

The international business of banks is now large enough to impact the domestic business also. Starting from late September 2008, the global financial crisis travelled to India primarily through the channel of Indian banks’ international operations. As liquidity seized up in the international branches, the same borrowers had no option but to make cash calls on the domestic branches, leading to an unprecedented liquidity crunch and spiking of rates.

This is not to advocate a retreat from the international business, but to emphasise the heightened risks, and that banks are still at the learning stage in this arena, necessitating more investments on their part in understanding international operations of India Inc, and perhaps even guide it. Beyond imposing basic prudence, RBI cannot do much as international businesses are governed by local regulators whose writ runs first.

From the occasional disclosures made by some banks, it appears that the international business has indeed been more profitable than the domestic business, tempting many to join the league. But that has been in an environment of low competition and traditional business in relatively stable geographies. All that is changing. Perhaps there is also a message embedded in the fact that the most consistently profitable private bank—HDFC Bank Ltd—has steadfastly maintained only a fringe presence in the international business.

The author has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services.

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