Mumbai // Foreign banks account for a tiny proportion of India’s network of branches, with a share of just 0.3 per cent, in a country where public sector lenders dominate the market.
Changes in regulations and India’s new government, however, could modify the landscape for foreign banks, enabling them to play a greater role in the South Asian country.
Investors are still awaiting direction on the economic policy of the recently elected Bharatiya Janata Party (BJP), but there are hopes that with the “business-friendly” prime minister Narendra Modi at the helm, foreign banks could benefit, amid widespread expectations that economic growth will be revived. This is despite a BJP spokesman last year questioning foreign bank reforms announced by India’s central bank and accusing overseas lenders of competing with Indian banks only in “the creamy business segment”, instead of helping to serve the masses.
“Policy wise, I believe the new government will be open to allowing a bigger role for foreign businesses including foreign banks,” says Kamal Sen, the president and chief executive of Cogitaas, a consultancy which specialises in strategy and planning.
The Reserve Bank of India (RBI) last November unveiled a new framework, designed to make it easier for foreign banks to open branches and potentially take over local companies if they set up wholly owned subsidiaries in the country. So far, no overseas banks have actually taken up this option, however.
Shashwat Sharma, a partner at KPMG, explains that foreign banks in India have largely focused on specific specialised products, working on complex products for large corporates and multinational accounts, while some have expanded to help global clients develop an Indian business model and assist Indian corporates who want to go to their overseas markets. Others have ventured into India-specific opportunities, particularly in the infrastructure and retail sectors. But foreign banks have shied away from getting involved in financial inclusion in India – where half the population does not have a bank account – and rural banking and agricultural lending.
“If you look at the full-fledged model, that model is still a little far away for most of the foreign banks,” says Mr Sharma.
“There are around 40-odd foreign banks in India but if you look at the share in terms of the total outstanding asset size of India, they are only at 5 per cent. If you look at the profit pool share, that goes up to around 9 per cent. Though they are operating at a much smaller scale, they are actually participating in more profitable lines of business in India.”
Standard Chartered, Citibank and HSBC are the “big three” foreign lenders in India.
Mr Sharma explains that overseas lenders have followed multinational accounts and trade corridors to India, which has helped to boost India’s economic links globally.
“Most of the foreign banks follow their clients, so if their clients see India as important the banks have to be in India,” he says “It’s driven more by the strategy of their clients. A lot of clients out of Japan and Korea have come to India very recently, and also China, because these economies are seeing India very seriously. If you look at the last few years, European banks, British banks haven’t really come to India in a very big way because they have their own economic challenges in their own markets and may not see India as that strategic, given the challenges they are facing.”
The outlook for foreign banks in India depends heavily the new government’s economic policies.
“It will really depend on the economic viability of the large clients of those countries and how they are doing in India, which will determine the foreign bank outlook,” Mr Sharma says.
“Based on how the government policies are on commerce and trade and how it will also help capital investments and what are the kind of infusions multinational organisations make in the country, and how Indian corporates want to expand, that will later determine how the banking inflows and outflows will happen.”
There are enormous opportunities to be tapped.
Despite strong ties between India and the Arabian Gulf region, GCC banks have a limited presence there. Among these, Abu Dhabi Commercial Bank has two branches in India – one in Mumbai and one in Bangalore. The UAE’s Mashreq has a branch in Mumbai. National Bank of Abu Dhabi (NBAD) was last month granted a banking licence in India, according to sources. This was the first to be awarded to a UAE lender in 34 years. NBAD declined to comment on the topic. Qatar’s Doha Bank in December was awarded a licence and is setting up a branch in Mumbai. UAE Exchange, the remittances company, applied for a banking licence in India through its local division in the country.
“If you look at the UAE and the GCC countries, there is a very large Indian diaspora and Indian workforce which is there, so that is an opportunity for them to leverage,” says Mr Sharma. “The other opportunity is if you look at the trade between and the Gulf, there’s a very healthy trade flow. The UAE is India’s biggest export partner through the UAE corridor, so that’s a huge opportunity for the banks in the Gulf.”
But there have also been a number of signs that suggest that India is a challenging market for foreign banks.
“American Express Bank’s exit from all but the card business, Barclays Bank’s foray in retail and subsequent exit from that business and some of the other banks’ experiments with SME lending and exit have also attracted attention to the flux in the non-corporate banking space,” says PwC.
“The surrender of bank licences by Morgan Stanley and UBS have further added to the impression that India presents unique challenges to foreign banks.”
While opportunities certainly exist in the Indian market, it remains to be seen how keen foreign banks will be to take on new risks.
“As far as foreign banks go, they have concentrated on metropolitan areas and on corporate and investment banking activities,” says Mr Sen. “Indian banks have focused on the retail markets and on branch expansion. India holds a huge potential for foreign banks to expand services, but they have to provide a broader range of services to a broader segment.
“Whether foreign banks will choose to play a significant role in the retail sector is a question,” Mr Sen adds. “In the corporate sector, whether they will chose to play beyond the larger corporates and take on different risk profiles is yet to be seen.”
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