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| Subir Roy: Indian banks' follies overseas | | VALUE FOR MONEY |
| Subir Roy / New Delhi Dec 10, 2008, 00:57 IST |
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Last month Reserve Bank of India announced a window to lend short-term dollars to Indian banks to help their foreign branches meet their obligations. Without this help they would have defaulted. Clearly an asset liability mismatch exists in their books. They have lent longer than their deposit base would permit. In fact, their deposit base is small. They borrow short in the wholesale market to lend longer. Now that the credit market has seized up, the central bank must come to the rescue.
This unhealthy practice has been on for not years but decades, with the full knowledge of the Indian regulator and Union finance ministry. The practices of the foreign branches of Indian banks came in for severe stricture in UK courts’ verdict in the suits filed by the liquidators of Bank of Credit and Commerce International (BCCI) against them. They had little corporate memory because of frequent personnel changes, poor quality of executives and poor transparency with local regulators, leading to action by them against Indian branches, according to D P Roy, a veteran State Bank of India hand who had substantial exposure to its overseas operations.
Clearly, these bank branches competed with each other to acquire poor quality assets, they didn’t have the expertise to support sound operations, neither did their head offices in India to back them up. “The aggregate results of all Indian banks from their global operations over the past 25 years (to 2005) would leave a deficit even ignoring the returns on funds deployed,” pointed out Roy in the Economic Times.
A lot may have changed for the better since BCCI was closed by the UK regulator in 1991. Meanwhile regulatory requirements like those on ‘know your customer’ have become more stringent. But the asset liability mismatch indicates that some practices have not changed and it is doubtful if the quality of assets tells a very different story today. If you cannot run satisfactorily a few foreign branches, can you acquire and supervise foreign banks?
India’s political leadership must think so and consider its biggest bank SBI as a case apart. It has asked the bank to go out to the world and acquire, and the bank’s leadership has responded with alacrity. In 2005 SBI said it was evaluating four banks with the aim of making acquisitions so that it could become one of the top three banks in Asia and one of the top 20 in the world. During that year and in the next it acquired two small banks (kirana shops, a banker described with contempt) in Indonesia and Mauritius. But the government had bigger plans for SBI. As recently as in September this year an unnamed senior SBI source told the media that it was planning acquisitions in Europe, North America, Middle East and Africa as prices were attractive!
The mindset is not confined to SBI. Again, as recently as in July this year ICICI Bank said it was eying foreign banks for acquisition, something it had ruled out in early 2007. Then in September its share price tanked. It saw an intruder under the bed and said rumour mongers were talking its share prices down. The policeman SEBI came, saw and couldn’t find any. More likely, the market was casting its verdict on the bank’s exposure to collapsed Lehman Brothers paper.
What is the lesson in all this? There is nothing wrong in inorganic growth, if it is needed to acquire long-term assets the way ONGC Videsh is doing. But you have to make sure what you are acquiring is worthwhile and you have the stomach for it. Indian banks are simply not yet ready to run successful foreign retail operations of any scale in these days of rigorous need to ‘know your customer’ and report on suspicious movements in accounts, if necessary even without telling the customer.
There is also no need to look beyond India’s shores to find avenues for growth. The huge challenge to take forward financial inclusion is waiting to be seized more than it has been till date. That is the opportunity at the bottom of the pyramid which FMCG companies are exploiting and thriving on even in today’s bleak environment. At a time when the world is trouping to India and China in search of growth it is hardly necessary for Indian banks to go out to mature markets in search of the same.
The worst motive for growth is that born out of hubris: India has arrived so it must have a bank which is as big as any other. It is necessary to first mind the basics. What is the quality of assets in the foreign branches of Indian banks? How come owner and regulator allowed the asset liability mismatch to take place and continue? Can we say that we will not go in for foreign bank acquisitions till we know how to handle them? Maybe the current global financial crisis is a blessing in disguise. It should have hopefully put in cold storage plans to make substantial foreign acquisitions. Roy reminds us of what happened to the UK’s Midland Bank. It acquired Crocker National Bank in the US and went bust in the process.
subir.roy@bsmail.in
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