A miscued opportunity

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Their financial health and brand image have taken a beating globally. Will there be any takers when India opens its arms to foreign banks?

Bayerische Landesbank AG (Bayern LB), an unfamiliar name in the Indian financial domain, is winding up its representative office in Maker Chamber VI, Nariman Point, Mumbai, even before it could make itself known. On the other hand, the oldest foreign lender in the country, Standard Chartered, is keen on making its hold stronger by acquisitions once the sector is opened for foreign players.

On the back of the global financial meltdown, the case of Bayern LB is not exactly what foreign banks are going through in India, though it’s true that most of them are critically reviewing their India strategy. The review is well justified for the fact that under the spillover effects of the global turmoil, growth dynamics of the Indian banking sector are undergoing changes. Also these banks are facing a real tough time on their home turf itself, which is forcing them to be more focused on their domestic strategies. But then, Darwin’s theory, survival of the fittest, is always there.

It is true that on the surface most banks in India have similar levels of profitability. But nonetheless there are “dramatic differences” in the underlying economics. A glance at the financials of Citibank, Standard Chartered, HSBC, ABN Amro and Deutsche Bank reveals that the former four have a similar split in revenues (65-70% from interest income and 30% from treasury) and for the latter the split stands as 50% form interest income and 40% from treasury. On a cumulative basis the net profit of these banks rose by 44.5%. Nevertheless, the foreign banks are experiencing a moderation in their growth rate (blame it on the fallouts of their global parents). Data from RBI (February 2009 bulletin) reveals that the credit growth of foreign banks operating in India dipped from 30.7% for the year up to January 2008 to 16.9% in January 2009. The net NPA ratio (2007-08) too has been escalating. To put into perspective the ratio for Citi is pegged at 1.23, up from 1.02. For Deutsche Bank it is 0.22 up from 0.01, for HSBC it is 0.58 up from 0.43 and for Barclays the ratio stands at 0.42.

The contours of the foreign banks (considering the review of policies on the presence of overseas bank in 2009) which are involved in a range of activities like consulting services, arranging trade finance, providing support to credit and project finance for infrastructure, energy, oil and gas through the balance sheets of their global parents is unlikely to yield any greater leeway. Dr. Rupa Rege Nisture, Chief Economist, Bank of Baroda, outlines, “Opening up the sector for foreign banks or infusion of foreign capital may help resurrect the weak banks in the private sector.” She further adds that the entry of foreign banks would greatly facilitate the process of consolidation and convergence of banks.

However, it will be a real challenge for the foreign banks, as they cannot raise money from the Indian market by getting listed on Indian bourses, which needs them to convert their Indian branch into a wholly owned subsidiary (WOS). And for the same they need to be registered. However given the fact that operating as a registered company has its own hassles including multiplicity of supervision, disclosure norms, minimum capitalisation (Rs.3 billion) et al, foreign banks would see no additional benefits in that. Changing global dynamics will ensure that despite the challenges, the entry of foreign banks will reduce the financial constraints in the economy. But then, that’s just theory. On pragmatic grounds, let the global parents revive first… till then rainy days ahead!

Gyanendra Kashyap

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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