Despite regulatory hurdles, foreign banks continue to be in a sweet spot

It’s easy to misunderstand Pramit Jhaveri, CEO of Citigroup (India), when he says, “It’s very much business as usual for us.” 

Few of his ilk have grown their books, and none have opted for local incorporation with its promise of near-national treatment. The last available consolidated data from the Reserve Bank of India shows there were 44 foreign banks with 295 branches at the of FY17; down from 46 and 325 branches in 2016. The fall is sharp, given that branch licences are hard to come by. In FY18, as a class they posted a net profit of Rs 103 billion, down 12.7 per cent even though total business (advances plus deposits) at Rs 7.72 trillion was up 7 per cent. 

Yet, if you were to compare profitability and return ratios, foreign players win hands down over state-run and even private banks. That’s because foreign banks play a relatively asset-light game and focus on fees in great measure; it would be erroneous to compare them with local banks as the business models are different.

At an inflection point

“Our success will always be based on the quality of our execution around our chosen client segments, platform and network. There exists an opportunity for us to act as a bridge between India and the rest of the world. This is true for trade, investment and capital flows, and foreign direct investment; both in- and out-bound,” explains Jhaveri.

The consolidation theme playing out now is being watched closely by their head offices; a few are sniffing big portfolio buyouts; the mandatory shift to the bond market to be affected by large borrowers presents them with a big window to be local debt arrangers and syndicators.

“Credit to private non-financial sector as a percentage of total credit in the first quarter of 2018 stood at under 56 per cent, compared to an emerging markets average of over 128 per cent according to the Bank of International Settlements. This alone is illustrative of the huge credit gap that exists in India,” says Ravneet Gill, chief executive officer of Deutsche Bank (India).

Regulatory potholes 

Foreign banks don’t get a clear run to their India ambitions as they appear inconsistent in their commitments, even as Mint Road expects a more predictable path that enables a long-term regulatory view on them.

You have two instances of foreign banks upping their local footprint substantially — Standard Chartered Bank’s (StanChart) buyout of ANZ Grindlays Bank in 2000, a global transaction; and ING Bank’s purchase of the Bengaluru-based Vysya Bank in 2002, an India-specific deal. The rest were all about passing-the-parcel.

Bank of America sold its Asian retail book in 1998 to ABN Amro Bank; the Dutch bank went piecemeal in October 2007 when a banking consortium of Royal Bank of Scotland (RBS), Santander Group and Fortis acquired it. In 2015, RBS exited India; and in the very same year, ABN Amro said it wanted to re-enter India!

Gill is guarded on the subject. “We have been in India for close to 40 years now. With close to ^2 billion of capital invested here, we are deeply committed to growing our domestic franchise. We have very ambitious investments plans to grow our local business.”

Yet, you can’t get away from the fact that Deutsche Bank sold its card business to IndusInd Bank in 2011; in April 2018 it called off talks to hawk its residual retail and private wealth businesses.

Says Jaspal Singh Bindra, chairman of Centrum Capital and former StanChart Asia CEO, on the strategic thinking in the many corner-rooms of foreign banks: “India is a rounding-off game as it is small in terms of contribution to the global bottom line save for a couple of these banks. The businesses are largely structured around portfolios (not full service) and if there is a realignment of priorities, India becomes a collateral in it.” It’s unsaid, but India is a Roman outpost.

The counter-narrative on regulatory treatment is equally compelling.

In June 2004, Niall Booker — the India boss of HSBC — cut a cheque of $67.6 million to private equity fund Actis for a 14.62 per cent stake in Axis Bank (UTI Bank) and dreamt of raising it to 20 per cent. But the then custodian at Mint Road Y V Reddy made HSBC  offload it within a year. 

But just two years earlier when Bimal Jalan was RBI Governor, Ewald Kist (the Dutch hockey Olympian) as global chairman of ING Barings gave a deft pass to Brussels Lambert Bank —a group concern no less — to pick up 20 per cent in Vysya Bank; it held on till 2015 when it sold it to Kotak Mahindra Bank.

The other headache is local managements of foreign banks must walk the tightrope between their home countries’ risk management and the local regulator’s push for inclusion, with little flexibility on branches. 

Says Standard Chartered India CEO Zarin Daruwala: “Yes, there are dual regulators, but we maintain a sharp focus on compliance with local regulations, including those related to priority sector lending (PSL).” The bank has a dedicated team to achieve the PSL requirements and has a portfolio of PSL qualifying MSME (medium and small enterprises) assets is higher than the 22 per cent minimum limit prescribed by the regulator. 

Jhaveri is right: it’s very much business as usual for foreign banks; at least for some, he would like to qualify.