The Road Ahead

Most commercial banks are in the process of taking the India story abroad. Tamal Bandyopadhyay wonders whether the gamble will pay off

ICICI Bank has acquired Investitsionno-Kreditny Bank in Russia. Bank of India and Bank of Baroda are aggressively looking for branch expansion in various countries. Even Punjab National Bank, which never had any significant overseas presence, now wants to go global in a big way.

The trigger point for the public sector banks’ global rush is possibly Finance Minister P Chidambaram’s focus on scale of business. The FM wants the country to have a few global banks.

How small are our banks? SBI, a giant on the domestic banking turf, is a pigmy by global standards. The entire SBI family (including its seven associate banks) stood 93rd among the global banks last year. Only five other Indian banks – ICICI Bank, Punjab National Bank, Canara Bank, HDFC Bank and Bank of Baroda – feature among the top 500 global banks. When it comes to the Asian market, only SBI features among the top 25 Asian banks. It is roughly one-fifth of the size of Bank of China, which tops the list of Asian banks. In fact, the size of the entire Indian banking industry is less than that of Bank of China (about 98 per cent). Indian banking assets are 34 per cent of Citibank’s and 33 per cent of UBS’.

No wonder then that the government-owned banks in India want to grow bigger by spreading wings abroad, particularly when they are not allowed to consolidate at home, thanks to the political resistance put up by the Left parties which fear that mergers among the domestic players would lead to job losses.

Generically, says Janmejaya Sinha, director, The Boston Consulting Group, there could be four reasons for going global. Banks can tap the overseas markets when the domestic market is saturated or existing income sources are being threatened and need to be defended by being present abroad. They can also go global if they have a competitive weapon – like a lower cost base on account of cheap technology and labour – to capture new markets. Finally, they can have an overseas presence to upgrade employees’ skills through global exposures.

The first reason clearly does not apply to Indian banks as India is the fastest growing banking market. Besides, there are hugely under-banked pockets in the country and only 20 cities account for 80 per cent of the new asset creation in the banking industry. So the growth opportunities within the country are enormous. However, the other three reasons could prompt the banks to look for opportunities overseas.

The maximum noise about going global has been made by SBI. In 2001, the US Federal Reserve restrained SBI from opening any new account in the US till it satisfied the regulators by putting in place proper systems and procedures in accordance with the Office of Foreign Assets Control (OFAC) of the US Department of Treasury. It even issued a cease and desist order and imposed a fine of $7.5 million on SBI for “apparent violation of Federal Deposit Insurance Corporation (FDIC) rules and regulations.”

However, SBI Chairman A K Purwar is not haunted by this nightmare anymore. He wants to go global to build size. The plan is to pick up small banks in Asia and Africa that could add value to SBI’s balance sheet. In October, it announced its intention to acquire 76 per cent stake in Kenyan Bank Giro Commercial for about $7 million. Giro Bank has an asset base of $60 million and is ranked 23rd among Kenyan banks in terms of assets. The bank has six branches in Nairobi and one each at Mombassa and Kisumu. In February, SBI had bought 51 per cent stake in Indian Ocean International Bank in Mauritius for about $8 million. It has also merged its Nigerian subsidiary – Indo Nigerian bank – with a local bank, Nal Bank.

Right now Rupali Bank of Bangladesh is believed to be on Purwar’s radar for possible acquisition. He wants to diversify risk by going in for smaller acquisitions. The plan is to follow the model of HSBC, which was a local bank in Hong Kong in 1947. Over the next 50 years, it became the world’s local bank. Its current international ranking is third. In contrast, SBI has a 200-year history behind it and still a minnow in global banking. Purwar wants to position it among the top 20 global banks by 2008. However, that seems to be a tall order as it has in fact, slipped from 82nd slot in 2004 to 93rd in 2005.

The bank management wants to follow Indian corporations and people of Indian origin aggressively and raise its global revenue from $12 billion to $15 billion by next year. Purwar also wants the bank’s global operations to contribute about 20 per cent of the total assets of the bank by 2008, from the current level of about 9 per cent. “If you look at any top player in the banking field, its overseas assets account for anywhere between 60 and 70 per cent of the asset book. We have a long way to go, but at least a beginning has been made,” says the SBI chairman.

ICICI Bank’s market share in the remittance business is about 15 per cent now. In effect, ICICI Bank wants to play its retail story on a global scale. “We are using the India linkages in our business model. The target is the NRI population, trade done by India Inc, local businesses and wealth management,” says Lalita D Gupte, joint managing director, ICICI Bank.

The focus is on distribution channels for both assets and liabilities. After all, the total NRI deposit base across markets was $32.8 billion on March 31, 2005. It has been addressed through tie-ups with local players abroad, besides setting up own branches and subsidiaries. For instance, there is an ICICI Bank desk at the outlets of Wells Fargo in the US. This diversified financial services company provides banking, insurance, investments, mortgage and consumer finance to more than 23 million customers through its 6,160 stores, the internet and other distribution channels across North America and elsewhere.

Similarly, it has struck an alliance with Lloyds TSB of the UK and uses its branches to expand business. It has also tied up with MeesPierson, a subsidiary of Fortis, for wealth managment. MeesPierson runs wealth management services for high networth individuals, their families and their corporations. ICICI Bank’s ATM in Canada offers a six-language menu including five Indian languages.

However, the basic difference between ICICI Bank and other Indian players in their overseas forays lies in the back-office operations. ICICI Bank is following a reverse BPO model for the entire processing requirement of its global operations, which is handled from India. This gives it cost advantage over the overseas players. Russia is the only country where ICICI Bank runs its back office locally because of the language barrier.

“Retail is the main focus area, but we are equally bullish on the corporate segment of the business. We are arranging money for Indian corporations that have set up shops abroad,” says Bhargav Dasgupta, senior general manager & head, international banking group, ICICI Bank. Indian corporations are setting up shops across the globe. The cumulative FDI outflow from India crossed $7 billion by March 2005.

Others like Bank of Baroda (BoB) and Bank of India (BoI) are also drawing up plans to open new branches in other parts of the world to add to the balance sheet size. BoI recently raised $250 million at 83 basis points over six-month Libor (London inter-bank offered rate) to build assets overseas. The finely-priced issue was over-subscribed three times.

BoB, which has the maximum number of overseas branches among Indian banks, plans to extend its existing network in the US and Hong Kong. It is also launching operations in Canada, New Zealand, Trinidad & Tobago and SAARC countries – Bangladesh, Maldives and Sri Lanka. “Our vision is to be identified as a multinational local bank – to be known for our global presence and local offerings rather than simply an Indian bank,” says AK Khandelwal, CMD, BoB.

When the Thailand government objected to the presence of an Indian Overseas Bank (IOB) branch in Bangkok after its nationalisation, six private banks came forward at Reserve Bank of India’s initiative, and Bharat Overseas Bank was born in 1973 as a special purpose vehicle to anchor Indian banks’ overseas operations. However, the proposal never took off.

TS Narayanasami, chairman and managing director, IOB, is not among those who are enamoured by the global call. His bank has branches in Singapore, Colombo, Hong Kong and Seoul and has recently opened a representative office in China. “Capital has a cost and I would rather use my capital for domestic operations,” says Narayanasami.

Indian Bank chief KC Chakrabarty too feels that unless the rupee becomes convertible, going global is not of much significance for Indian banks. “I agree that an overseas presence is required to expose our employees to the global best practices. Barring this, there is no other reason to go global,” he says. However, these are a few voices of dissent. Overall, the banking industry is determined to follow the footsteps of the manufacturing sector and take the India story abroad.•