Foreign Banks in India: Don’t just judge them by volume

This is an exclusive cover story written for the magazine ‘4Ps Business & Marketing’. The article traces the growth of foreign banks in India and the way forward.

May 25, 2010 2:22 IST | India Infoline News Service

Unlike their volume-driven Indian counterparts, foreign banks in India have been predominantly characterized by their limited presence across the nation. As on June 2009, the 32 foreign banks comprising 293 branches, constituted a mere 0.5% of the total branch network in India. Riding on the competitive edge spelt by the use of high-end technology, a customer-centric approach and innovative, diverse product offerings, these banks have typically set shores in metropolitan regions (almost 80% as compared to 35% new Indian private banks, 20% old private banks and 20%  PSU banks).

But the restricted spread has in no way limited the prospects for these players who have registered steady growth on all parameters. Despite the 0.5% share of the network, the market share stands at an impressive 6%. The 32 foreign banks cumulatively accounted for 5.5% of total system advances, 5.3% of system deposits, 18% of operating profit and 14% of system net profit in FY09. This is commendable given the low penetration. This is largely the result of an improving economic environment and pick-up in credit activities.

In contrast, the major factor that has adversely affected the foreign banks is their concentration on the retail segment, which was truly down and out during the downturn of the global financial crisis. The consequence is obvious - their loan book went up by a mere 3% while the Indian private counterparts saw a 12% rise during the same period. While the strong branding, better customer service and product innovation initially helped them make strong inroads into retail and SME lending, the resultant book seasoning turned a large part of these loans into NPLs, thereby resulting in higher provisioning and deterioration in asset quality.

The balance sheet story has been pretty obvious. While foreign banks outpaced its Indian peers (PSU and private banks) on all parameters including loans, deposits and CASA, the credit related activities took a beating, thanks to the downturn.

In February 2005, the RBI had released the ‘Roadmap for presence of foreign banks in India’ laying out a two-track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India.

The first track was the consolidation of the domestic banking system, both in the private and public sectors. The second track involved the gradual enhancement of foreign banks in a synchronized manner. This roadmap was divided into two phases, the first phase spanning the period March 2005 – March 2009, and the second phase following the review of the first phase experience.

In the first phase, foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 100% wholly-owned subsidiary (WOS), following the one-mode presence criterion. Foreign banks already operating in India were also allowed to convert their existing branches to WOS while following the one-mode presence criterion. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion in India. No foreign bank, however, applied to establish itself as a WOS or to convert to a WOS during the first phase.

Just when the revision of presence of foreign banks in India was due in April 2009, the global financial markets went in turmoil and uncertainties plagued the financial strength of banks around the world.

Accordingly, the Annual Policy statement of April 2009 indicated the intent to continue with the current policy and procedures governing the presence of foreign banks in India and to review its roadmap after due consultation with the stakeholders once there was greater clarity regarding stability and recovery of the global financial system. Accordingly the annual monetary policy 2010, directed to prepare a discussion paper on the mode of presence of foreign banks through branch or WOS by September 2010. In all probability, the outcome is likely to encourage more investments in India. The next four years promises a launch pad to foreign banks for substantial business expansion.

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