Middle India is gaining popularity among foreign banks in the country. It is partly due to regulatory compulsion but also because of growing business opportunities in smaller towns.
The Reserve Bank of India (RBI) has not allowed large foreign banks to open branches in metropolitan cities in the past five years. This has resulted in places such as Proddatur, Nandyal and Nanded getting foreign bank branches.
“RBI does not appreciate the idea of large foreign banks having more branches in metro cities,” said a top executive of a large foreign bank who did not wish to be named. “There are no guidelines or written communication. But they have made it very clear that they want foreign banks to expand into deeper geographies.”
Naturally, the share of non-metro centres in foreign lenders’ branch network in the country is on the rise. Standard Chartered Bank, with the largest footprint among foreign banks in India, has 35 per cent of its 94 branches outside the top six cities. It plans to add another six — in Agra, Chhindwara, Jodhpur, Moradabad, Thiruvanantha-puram and Udaipur.(BRANCHING OUT)
Rival Hongkong and Shanghai Banking Corporation (HSBC) has 46 per cent of its 50 branches in smaller centres, including places such as Coimbatore and Mysore.
Typically, foreign banks hold “informal” discussion with RBI before they formally apply for branches. “In these meetings, we debate if a particular location will suit our needs and aid RBI’s agenda of financial inclusion. Once the location is finalised, we make a formal application,” said a senior with a large foreign bank.
According to bankers, they sometimes agree to open branches in remote locations on the condition that they’d be given branch licences in state capitals. “Typically, a branch in Mumbai will take 18 months to break even. But a branch in Moradabad or Akola may take 36 months to break even, as the scope for lending is limited in these places. So, sometimes we agree to open a branch in a tier-II or III centre if we are allowed to set up a branch in a state capital,” said one.
But regulatory compulsion aside, foreign banks are also embracing tier-II locations for business opportunities. Senior bankers said cities such as Ahmedabad, Surat, Nagpur and Kolhapur are considered important trade centres, and these locations are gaining popularity among foreign banks.
For instance, StanChart, HSBC, Royal Bank of Scotland and Deutsche Bank have branches in Ludhiana. Similarly, StanChart, HSBC and Citibank have opened branches in Indore. Bankers said the revised priority sector lending target for large foreign banks has also made it necessary for these lenders to have presence in deeper geographies. “As part of our retail strategy, we plan to have presence in cities that are important trade centres. We have identified 16-17 such locations and will cover these centres in the next few years. It will help, as the priority sector lending target has now been revised upward,” said a banker.