India's banking sector landscape is not an easy one for international lenders to navigate.
Yet global banking major HSBC last week launched its largest branch in India, in the city of Bengaluru, offering banking and wealth management services to affluent clients.
HSBC India, which has 26 branches in 14 cities in the country, said the newest addition to its network was “a strategic move to tap into the vibrant economic landscape and growing affluence, in one of the world’s fastest-growing economies”.
“Entrepreneurialism and innovation are fuelling wealth creation in India and at HSBC India we embrace this spirit by strengthening our presence further,” Sandeep Batra, head of wealth and personal banking at HSBC India, said during the launch.
The push to expand operations in Asia’s third-largest economy is a reversal of some foreign lenders' moves to scale back retail operations in India in recent years. HSBC also halved its number of branches in 2016 – as competition from domestic banks and unfavourable regulations made it a tough market to operate in.
There are 44 foreign banks in India, according to data from the Reserve Bank of India (RBI), the country's central bank. They have a 4.6 per cent share of total deposits in the country and account for 6.4 per cent of total banking assets.
But the number of branches run by foreign banks declined for the second consecutive year to 782 in the financial year ended March 2023, from 861 the previous year. The RBI said this drop reflected “rationalism for cost optimisation” by lenders.
Last March, Citi announced it had completed the sale of its consumer business in India to Axis Bank, one of the country's largest private banks, in a $1.4 billion deal. Citi said this included credit cards, retail banking, wealth management and consumer loans, as well as the transfer of 3,200 Citi employees.
However, the US lender's institutional client businesses in India were excluded from the sale and Citi said India remained “a critical institutional market”.
BNP Paribas, Barclays and RBS are also among the foreign banks that have downsized or scrapped their retail businesses in India.
The landscape of the retail banking segment in India is particularly difficult, says Jyoti Prakash Gadia, managing director at Resurgent India, an investment bank.
“The retail segment specifically involves lesser profit margins, greater handling costs and competition from both private sector and public sector Indian banks who have put a lot of thrust on the retail segment in the last several years,” he says.
Meanwhile, the business plans for foreign banks are largely determined by strategies based on alternate opportunities at the global level and their comparative strengths in niche areas.
"The overall cost-benefit analysis for a particular segment, the past experience as regards asset quality and emerging trends lead to such decisions [to exit the country] by the respective banks," Mr Gadia adds.
Competing with the robust local banks to target the domestic population is not easy.
“In retail banking, foreign banks appear to play a larger role for non-resident Indians and foreigners living in India than for domestic residents,” says Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers, based in Mumbai.
He says “the extensive branch network of Indian banks” limits the appeal for many foreign lenders in terms of collecting deposits from retail operations.
“Global mergers and acquisitions among banks and changing business focus have played a role in scaling down of operations in India by some of the foreign banks," Mr Hajra says.
"Foreign banks' operating expenses in India are frequently high, which can pose a challenge to the sustainability of some branches."
Akshar Shah, founder and chief executive of digital investment marketplace Fixed Invest, says it's more accurate to view the recent reduction in physical branches by foreign banks as a "strategic reallocation of resources".
“Acknowledging the fierce competition and demand for specialised expertise, they're wisely focusing on their core strengths in corporate finance, wealth management, and digital channels. This approach allows them to overcome branch network limitations and cater to the specific needs of Indian customers more effectively."
India, expected to be the world's fastest growing major economy this year, offers several opportunities for overseas banks.
“The overall expansion of the economy and greater spending power of the middle class will create large volumes of retail business in the middle to long term,” Mr Gadia says.
More Indians are joining the ranks of the wealthy. The number of people in the country with assets worth more than $1 million will more than double by 2027 from five years earlier, Knight Frank India said in a report. Meanwhile, the number of people with a net worth of more than $30 million is expected to increase by about 58 per cent.
Corporate banking is one of the main areas offering growth potential.
“Foreign banks with a physical presence in India have an advantage in corporate and wholesale banking because they can build relationships and offer banking services to relatively large Indian companies, particularly those with no or limited foreign presence," Mr Hajra says.
“Foreign banks can help Indian corporations raise funds overseas and offer non-fund-based services, particularly those related to cross-border operations like international letters of credit or international bank guarantees.”
According to Mr Shah, overseas banks' expertise in wealth management, corporate banking and international trade finance also helps the growth and innovation of the Indian banking ecosystem.
“While foreign banks may not dominate physically, their role remains crucial,” he says.
But given the challenges, Mr Hajra does not foresee significant expansion of foreign banks' branch networks in India in the medium term.
"A greater number of foreign banks may begin operations in India to serve the Indian diaspora living in those countries as well as residents of those countries living in India," he says.
Sameer Singh Jaini, founder and chief executive of consulting firm Digital Fifth, believes only a small number of foreign banks will succeed in achieving substantial growth in India.
“It's a task that demands a local and patient approach, with a focus on building specifically for the Indian market. The previous allure of foreign banks, once associated with premium services, has diminished due to the enhanced performance of Indian-owned private sector banks.”
But for those that do succeed, the rewards can be significant.
